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Do Students Get Special Tax Breaks?

By Matthew Frankel, CFP® - Apr 8, 2016 at 7:57AM

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There are tax breaks for students before, during, and after college.

Image source: Flickr user Visha Angelova.

Being a college student in the United States is getting more and more expensive every year. However, the good news is there are several tax benefits available to college students, and some are pretty valuable. Here's a rundown of some of the tax breaks available to students (and their parents, too) before, during, and after college.

Three big tax breaks for tuition and other expenses: Which is best for you?
The main tax breaks for students come in the form of credits or deductions for paying tuition and other required expenses, such as lab fees, books, and required equipment. The particular tax break you (or your parents) qualify for depends on your enrollment status in school and your modified adjusted gross income (MAGI).

  1. American Opportunity Credit: This is usually the most lucrative tax break for those who qualify, worth up to $2,500 per year. The credit is for 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000. To qualify, the student must be enrolled at least half-time in a degree or certificate program, and must be in the first four years of postsecondary education. Forty percent of this credit may be refundable, meaning that it can be paid even if the individual claiming it has no tax liability. The MAGI limits for a full American Opportunity Credit are $160,000 and $80,000 for married and single filers, respectively, and a partial credit may be available for MAGI up to $180,000 and $90,000.
  2. Lifetime Learning Credit: This is worth 20% of the first $10,000 in expenses, so up to $2,000 per tax return. While not as lucrative, the Lifetime Learning Credit is less restrictive than the American Opportunity Credit. Specifically, there is no enrollment or degree program requirement -- even if you're just taking a single class for personal enrichment, you can qualify. This credit begins to phase out for MAGI above $110,000 (married) and $55,000 (single).
  3. Tuition and Fees Deduction: This is generally used by people who would otherwise qualify for the Lifetime Learning Credit, but don't meet the income thresholds. This deduction can reduce your income subject to tax by up to $4,000, and a full deduction can be taken by taxpayers whose MAGI is less than $130,000 (married) or $65,000 (single).

Tax-free income for students
If you receive a scholarship, fellowship, or tuition assistance from your employer, it could be tax-free provided certain conditions are met.

Scholarships and fellowships are tax-free if you're a candidate for a degree at an eligible institution and the funds are used to pay for tuition, fees, or other course-related expenses. Money used to pay for room and board, travel expenses, and other non-qualified expenses is not tax-free.

Educational assistance from your employer can be excluded from your income, up to $5,250 each year, as long as the money is used for qualified course-related purposes. Money used for meals, lodging, transportation, or any other purpose isn't tax-free.

Tax-advantaged college saving
This is a tax break for before you or your child start post-secondary education. There are two main types of tax-advantages college savings plans: a 529 Savings Plan or Coverdell ESA.

Both accounts work like Roth IRAs in terms of tax benefits. That is, contributions are not deductible, but qualified withdrawals for education are 100% tax-free. Plus, you may be able to get additional tax breaks from your state.

529 savings plans allow you to set aside money in a variety of mutual funds, similar to a 401(k). Contribution limits are high (well over $300,000 in many cases), and the plans are administered by the states. On the other hand, Coverdell ESAs are more flexible – allowing you to invest in virtually any stocks, bonds, or funds you want. However, the contribution limit is much lower at just $2,000 per year. Here's a more in-depth look at both of these options.

Student loans? There's a tax break for that, too
Student loan debt has skyrocketed over the past few decades, and is now the second-largest form of debt in the U.S., behind mortgages. If you're among the millions of Americans with student loan debt, there's a deduction you may be able to take advantage of.

The student loan interest deduction can be taken on up to $2,500 in interest paid per year, and it phases out for MAGI above $130,000 and $65,000 for married and single filers, respectively.

It's also worth noting that the student loan interest and the tuition and fees deductions are "above the line" deductions, meaning that they can be taken even if you don't itemize.

An important final thought...
As you can see, there are numerous tax breaks available to students. However, this is not an exhaustive list.

Specifically, your state might (and probably does) offer its own education-related tax breaks, so it's also worth looking into these. When you're a college student, or are paying for one, every little bit helps, so be sure you're getting all that you deserve.

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