With the economy still in recovery, the job market is more competitive than ever and many adults are returning to school to enhance their education. While earning an advanced degree may improve your employment prospects, it can also put a major strain on your budget. There is good news, however, since there are some tax benefits that can help make getting your degree more affordable. If you’re planning on going back to finish up your bachelor’s degree or you’ve got your sights set on graduate school, it pays to know about these key tax breaks.
American Opportunity Credit
The American Opportunity Tax Credit modified the Hope Credit, making it easier for more taxpayers to save on out-of-pocket education expenses. The credit is primarily designed for parents who are paying their children’s college costs but it also applies to adults who are going back to school. As of 2013, the credit was good for up to $2,500 of qualified education expenses, such as tuition, fees and course materials, paid to an eligible institution for up to four years. An eligible educational institution means any school that’s eligible to participate in federal student aid programs. Your eligibility to claim the credit depends on your filing status, income and whether or not you’ve already earned a degree. For 2013, the full credit was available to single filers with a modified adjusted gross income of $80,000 or less and married couples filing jointly with an AGI of $160,000 or less. If you’ve already completed a four-year year degree, you won’t qualify for the American Opportunity Credit but you may be eligible for the Lifetime Learning Credit.
Lifetime Learning Credit
Unlike the American Opportunity Credit, there’s no limit on the number of years you can claim the Lifetime Learning Credit and you don’t need to be enrolled in a degree program. This means that you can claim the credit even if you’re just going back to school to take a few specialized courses. As of 2013, you could claim the credit for up to $2,000 in qualified education expenses, including tuition, fees, books, supplies, and equipment. The rules for eligible educational institutions still apply. Your eligibility is also subject to certain income limits. For 2013, adult students could claim the credit if they’re single and have an AGI of $62,000 or less or married filing jointly with an adjusted gross income of $124,000 or less. Keep in mind that if you’re married but file your taxes separately, you can’t claim the credit at all.
Tuition and Fees Deduction
If you don’t qualify for either the American Opportunity Credit or the Lifetime Learning Credit, you can still save on your tax by claiming the tuition and fees deduction. This deduction can reduce your taxable income by up to $4,000 and you don’t have to itemize to claim it. Generally, you can claim the deduction if you paid qualified education expenses for yourself or your spouse to attend an eligible educational institution. Your ability to claim the deduction is based on your income. For 2013, the deduction is phased out for single filers with a modified adjusted gross income of more than $80,000 and married couples with an AGI over $160,000. Similar to the education tax credits, you can’t claim the deduction if you’re married but file separate returns. You also need to keep in mind that if you’re eligible for the other education tax credits, you can’t claim the tuition and fees deduction for the same expenses in the same tax year.
What If I’m Eligible for More Than One Tax Break?
Depending on your situation, it may be possible that you’re eligible to claim both a credit and a deduction for going back to school. Tax credits reduce your tax liability dollar for dollar while a deduction lowers your taxable income. In situations where you qualify for both the American Opportunity Credit and the tuition and fees deduction, the credit will mostly likely yield the biggest tax savings. If it’s a choice between the Lifetime Learning Credit and the tuition and fees deduction, you have to look at the amount of qualified expenses you have, your current tax rate and how close you are to the income phaseout limits. The key is to understand how each education tax benefit works so you can put the most money back in your pocket at tax time.