Understanding Tax Credits for University Students
On December 9, 2009 Gina Gwozdz posted this excerpt from Stephanie Miles, a freelance writer for Guide to Online Schools on her blog “Gina’s Tax Tips.” I thought this was helpful in understanding the various programs and tax breaks out there for students.
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Tax Breaks for University Students
When you’re studying for midterms, writing thesis papers, and dealing with the day-to-day drama of dorm life, understanding the federal and state tax codes is probably the last thing on your mind. In an era where every dollar counts, though, it may be worth it to gain a little more understanding of which tax breaks you qualify for—and which you don’t—as a university student.
Thanks in large part to the Taxpayer Relief Act of 1997, a number of student loan tax credits have been created to reduce the financial burden on undergraduate students and their parents. A few of the most popular of these options are the Lifetime Learning Tax Credit, the Hope Scholarship Tax Credit, and the Tuition and Fees Tax Deduction, all of which help reduce the tax liability for those going through the stressful years of post-secondary training. The American Opportunity credit replaces the Hope credit for 2009 and 2010, and provides a partially refundable credit.
The Lifetime Learning Tax Credit
Lifetime Learning credits are nonrefundable tax credits that are given out to eligible students or their parents. If you paid any expenses to attend an accredited university during the past year, then you may be able to subtract the amount you paid in tuition and fees—up to $2,000—directly from your taxes owed. Unlike deductions, which simply reduce your tax burden, tax credits will specifically lessen the amount of taxes you owe in a given year. In addition, Lifetime Learning credits are available for all years of a student’s postsecondary education, which makes them an especially attractive option for many taxpayers. To obtain this credit, students or their families must report the amount of tuition and fees paid on an IRS Form 8863. The university itself will also be required to fill out a 1098-T statement listing all fees and payments made, copies of which will be sent to both the taxpayer and the IRS.The Hope Credit (for 2008)
Despite the name, the Hope credit is not actually a traditional scholarship. Instead, it is a nonrefundable credit that is subtracted from a student or family’s taxes at the end of the year. Students and their families can claim this credit, which varies in amount based on how much income each family earns, for the first two years of that student’s post-secondary education. After this, they are no longer eligible for the credit. Just as with the Lifetime Learning credit, though, families hoping to qualify for the Hope credit must fill out the IRS Form 8863 with information provided by the university on a separate 1098-T statement.The American Opportunity Credit (previously Hope Scholarship Tax Credit)
The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. Just as with the Lifetime Learning credit and Hope Credit, though, families hoping to qualify for the Hope credit must fill out the IRS Form 8863 with information provided by the university on a separate 1098-T statement.Tuition and Fees Tax Deduction
For those who may not qualify for the Lifetime Learning, American Opportunity or Hope credits, the tuition and fees tax deduction can serve as a way to reduce a student or family’s taxable income by as much as $4,000 a year. Unlike credits, which are directly taken off the top of the amount you owe in taxes, deductions are a way to lower your overall taxable income. To qualify for the deduction, students must be enrolled in one or more courses at an eligible education institution. In addition, anyone planning to take this deduction must make sure to receive a 1098-T statement stating the amount of tuition and fees paid during the past year from the student’s institution.Whether you are a student or a parent, it’s worthwhile to learn about the tax benefits that are available to those who are paying for a higher education. After all, just 10 minutes of research could end up saving you thousands of dollars on your taxes each year.
Notes from Gina:
The American Opportunity credit replaces the Hope credit for 2009 and 2010. The Tuition and Fees Deduction is scheduled to expire at the end of 2009.You may be eligible for the any of these deduction or credits; thus my suggestion is to calculate how much tax benefit you would obtain for each and then go with the one that will ultimately put more cash back in your pocket. Qualifying expenses include amounts paid for tuition and required educational fees.
You must reduce your qualifying expenses when figuring your tax credit by the amount of financial assistance received from grants, scholarships, or reimbursements from your employer.
If your son or daughter is going to college, and you claim him or her as a dependent, then you can claim the education credits on your tax return. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return. If you pay the college expenses for someone who is not your dependent, you cannot claim any education credits.