By Jason Watson (Google+)
Some tax benefits for higher education costs are in the form of deductions to your income. These amounts are dollar for dollar reductions in the income amount used to calculate your taxable income. The more you can deduct, the less income there is that is subject to being taxed. The two education deductions available are: the Tuition and Fees deduction and the Student Loan Interest deduction.
Tuition and Fees Deduction
You can take this deduction only if you have paid qualified tuition and fees to an eligible education institution, your filing status is not married filing separately, and you cannot be claimed as a dependent on someone else’s tax return. Expenses such as insurance, medical expenses, transportation, personal and living expenses, are not allowed when claiming the credit. No parking passes either.
Additionally, you must reduce the amount you paid by any tax free funds used to pay the education expenses. Sorry but IRS says no double dipping (this applies to any tax favorable treatment)! Tax free funds include scholarships, Pell grants, educational savings accounts (ESA’s), employer assistance, and savings bonds.
Income limits do apply. A deduction for you, your spouse or qualified dependent of up to $4,000 can be taken if your income is less than $80,000 (single) or $160,000 (married filing jointly).
Student Loan Interest Deduction
When you take out a student loan to pay for your education, some of the interest you pay for qualified education expenses can be deducted. The annual limit is maxed out at $2,500 of the student loan interest you pay.
You must have been enrolled at least half time when you took out the loan and the loan must have been used to pay for books, supplies, and equipment that are needed for a course regardless if they are purchased from the institution as a condition of enrollment.
If you’re lucky enough to have someone pay some or all of your student loans for you, in some cases you may still claim the student loan interest deduction. Bottom line, the student loan must be your debt obligation. That’s the kind of gift that keeps on giving!
One last item of importance, income limits exist when determining if you can take this deduction. If your income is over $75,000 (single) or $155,000 (married filing jointly), then you cannot take the student loan interest deduction.
| Single Filers | Married Filing Joint | |
| American Opportunity | <$90,000 | <$180,000 |
| Lifetime Learning | <$62,000 | <$124,000 |
| General Tuition, Expenses | <$80,000 | <$160,000 |
| Student Interest Deduction | <$75,000 | <$155,000 |
| Coverdell Contributions | <$110,00 | <$220,000 |
| Savings Bonds Redemption | <$87,850 | <$109,250 |
Because of these income limits, parents need to be careful. If the parent attempts to take the deduction, you might be phased out due to income. So, in that case it might be better for the student to take the credit. Planning is important here. And the right tax preparation can yield a lot of money for the “family”. How it is duked out at Thanksgiving is beyond our expertise, but take the money.. some way some how!
Also, note that filing married separate kills most education deductions, credits, etc.