5 Sweet Tax Breaks for Students

Tax season can be a huge source of stress. Find out about five tax credits, deductions and incentives that might help students and their families save on their taxes this April.

Apr 12, 2014 at 10:22AM

For most families, tax season is *almost* as fun as a root canal, but for those paying tuition bills, the possibility of owing more money to the government is likely to be nauseating. These tax breaks might save you a serious chunk of change when April 15th rolls around. Here are five potential tax breaks for students.

The American Opportunity Tax Credit
The mother of student tax incentives, this credit is available to students in their first four years of higher education, and it could knock up to $2,500 off of their tax obligation. To receive the full credit, independent students and guardians of dependent students must have adjusted gross incomes of $80,000 or below ($160,000 or below for joint filers) and will receive a dollar-for-dollar reduction for the first $2,000 spent on tuition, fees and course materials, followed by a 25 percent reduction on the next $2,000, according to the IRS.

"Getting a $2,500 tax credit is equivalent to getting a $2,500 grant," says Sandy Baum, a senior fellow at the Urban Institute and research professor of education policy at George Washington University. "... It's important to understand that [the credit] really does diminish the amount that it costs you to go to college in exactly the same way it would if it were a grant."

A double bonus, Baum adds, is that American Opportunity credit is partially refundable, meaning that students don't need to pay taxes in order to get a portion of the credit. Families with incomes low enough to skip filing a tax return may be eligible for up to $1,000 in free cash. A guide to whether you need to file a tax return is available on the IRS website.

Lifetime Learning Tax Credit
The American Opportunity credit can only be claimed for up to four years per student, but there's no limit on how long families can claim the Lifetime Learning Credit. The catch is that you'll have to spend more to get the full benefit. Unlike the American Opportunity credit, which provides a dollar-for-dollar tax match for the first $2,000 families spend, the Lifetime Learning incentive only provides a credit equivalent of 20 cents for every educational dollar families spend up to $10,000.

That's a maximum tax credit of $2,000 annually for $10,000 spent on tuition fees and supplies. The income restrictions are also a bit different. The Lifetime Learning tax credit is available in full for single filers earning $53,000 or less ($107,000 for joint filers). Partial credit is available for single filers with incomes below $63,000 ($127,000 for married couples).

"[Tax credits] are a financial benefit, but you don't get it at the time your tuition bill is due," explains Karen McCarthy, a policy analyst for the National Association of Student Financial Aid Administrators. "You pay during the year and then the following year when you're filing your taxes, that's when you claim the tax credit. ...The timing is a little bit out of sync."

The Lifetime Learning credit is nonrefundable, meaning that it's only available to those earning enough to file an income tax return.

Tuition and Fees Deduction
Deductions aren't generally as sweet as tax credits, but they can still help. Only available to families who don't claim either of the above credits, the full deduction of up to $4,000 is offered to individuals earning $65,000 or less ($130,000 or below for married filers). A partial deduction is available for single filers earning $80,000 or below ($160,000 for married couples).

Joseph Cunningham, an assistant professor of accounting at Albright College, is quick to point out that a deduction isn't the same as a credit.

"Tax deductions are a reduction of taxable income. For example, if a taxpayer was entitled to deduct $4,000 of these expenses, then their taxable income would be $4,000 less," he says. "A tax credit is a reduction of the taxes owed."

Before claiming a tuition and fees deduction, Cunningham recommends researching whether you qualify for a tax credit and then carefully comparing your options.

Student Loan Interest Deduction
If you're paying a student loan, you can also deduct up to $2,500 of your interest, even if you qualify for other education tax incentives.

"Most student loans made through commercial lenders are eligible for deductions, but there are limitations," Cunningham says. "If a [relative] made a loan to a student then the interest from that loan would not qualify."

Student loan interest deductions are only available for single filers earning below $75,000 ($155,000 for joint filers) and may include any funds paid as origination fees, interest on refinanced student loans and credit card interest if the debt was taken on solely for qualified education expenses. A list of those expenses is available on the IRS website.

529 Incentives
The federal government offers tax-free growth on funds in a 529 prepaid or college savings plan, but many states also offer their own incentives, though these differ quite a bit from state to state, says Karen McCarthy.

Alabama, for example, offers a deduction of up to $10,000 for joint filers, while Illinois offers a walloping $20,000 deduction for married couples annually. If you have a 529 plan and are unsure of whether your state offers a tax incentive, a simple call before tax time could help pad your wallet.

The original article: 5 sweet tax breaks for students appeared on Schools.com.

1 final little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Additional college articles can be found on Schools.com.

If only Daenerys had an MBA: Degrees for Game of Thrones characters

Should you take the ACT or SAT?

Five software tools to help online students avoid distractions

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information