Heading Back to School? Tax Breaks for Adult Students

With unemployment still high, more older Americans are heading back to school in hopes of improving their job prospects. Of the estimated 20 million college students nationwide, 25% are over the age of 30, according to the U.S. Department of Education. The National Centerfor Education Statistics estimates that college enrollment among students 25 or older will increase by 23% through 2019. If you’re one of the millions of adult students who’s returning to school, you can potentially enjoy some significant tax savings while completing your education.

American Opportunity Credit

If you’re enrolling in an undergraduate program for the first time on at least a half-time basis, you may be eligible for the American Opportunity Credit. If you qualify, you can get a credit of up to $2,500 towards the cost of your tuition, books, fees, supplies and equipment. Up to $1,000 of the credit is refundable, which means you can get it even if you don’t owe the IRS any taxes. The credit expires at the end of this year but you can still claim it on your 2012 taxes as long as you’re within the IRS income limits. Single filers must have a modified adjusted gross income (MAGI) of $80,000 or less and joint filers can earn up to $160,000 to qualify.

Lifetime Learning Credit

Older students who are pursuing a graduate or professional degree can claim the Lifetime Learning Credit to offset some of their education costs. You can claim the $2,000 credit if any qualifying expenses, including tuition, books and fees. It’s important to note that you can’t take the credit for medical or transportation expenses you incur as a result of your enrollment. Your MAGI must be $61,000 or less if filing single and $122,000 or less if filing a joint return. Keep in mind that you can’t claim the credit if you’re married but file separately and you can’t take the American Opportunity Credit and the Lifetime Learning Credit in the same tax year.

Deducting Tuition and Student Loan Interest

Another option for reducing your tax liability is to claim one of two deductions for college expenses. The IRS allows you to claim a deduction for tuition and fees, which can reduce your taxable income by up to $4,000. The deduction is good towards any fees you pay as a condition of your enrollment but it doesn’t cover personal expenses like room and board or transportation. To qualify, your MAGI must be $80,000 or less for single filers and $160,000 or less for couples filing jointly. You can claim the deduction whether you paid the tuition and fees out-of-pocket or using a student loan. If you receive any tax-free education assistance, such as scholarships, grants or employer assistance, you can only claim the deduction for the amount of expenses you were actually responsible for paying.

Adult students who take out student loans to cover their education costs may also qualify for a deduction on interest paid. The deduction can reduce your taxable income by up to $2,500 as long as you were enrolled at least half-time in an accredited degree program at the time you took out the loan. Your modified adjusted gross income must also be within IRS limits to qualify. As of 2012, single filers were limited to a MAGI of $75,000 or less and joint filers could earn up to $150,000.

Tapping Your IRA for Education

If you’ve build up a retirement nest egg, using IRA funds to pay for your education is one option to consider if you don’t want to take out student loans. Typically, you must pay a 10% withdrawal penalty if you take money out of any IRA before age 59 ½. However, the IRS waives the 10% penalty if you’re using the money for qualified education expenses. To get the tax break, you must be enrolled at least half-time in an eligible educational institution, which is defined as any school that participates in federal student aid programs. You may still have to pay income tax on any part of the distribution that’s taxable unless it’s equal to or less than your adjusted qualified education expenses.

Earning a college degree is a significant achievement and it’s never too late to get started. With all of the tax benefits available to older students, it’s easier than ever to achieve your educational goals and save money along the way.