Study Up on Education Tax Benefits

We know the cost of higher education is steep. With all this fall-season talk of tuition bills and student loans, a quick reminder from our friends at the IRS: don’t forget about the education tax benefits that can help offset some of those costs! The benefits listed below may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Of course, these benefits are subject to income limitations and may be reduced (or unavailable) depending on how much you earn.

If the words ‘campus’ and ‘syllabus’ have entered the dinner table conversation, make sure you don’t overlook these education benefits when it comes time to file. Remember: a tax credit reduces the amount of income tax you may have to pay, while a deduction reduces the amount of your income that is subject to tax and (typically) reduces the amount of tax you might have to pay.

Per the IRS:

1. American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education at an eligible institution. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.

2. Lifetime Learning Credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student.

You can claim only one type of education credit per student in the same tax year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

3. Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

Studying up now may make the difference between a tax return and a tax bill, so be sure you understand the details; visit the Tax Benefits for Education Information Center or this video for the nitty-gritty, or consult a tax professional.

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