College students these days tend to be pretty strapped for cash. Between tuition fees, student loans, buying textbooks and paying for room and board, college costs add up quickly. One perk that college students get, however, is a few tax breaks that others can’t access. Some tax breaks have even been created exclusively for students.
There are two main types of tax breaks for college students: credits and deductions. Learn more about these tax breaks to help offset some of those educational expenses.
When it comes to doing your taxes, credits are considered to be more valuable than deductions. That’s because credits reduce your tax liability while a deduction only reduces the income on which your tax is calculated. Here are the options for students looking to get credits on their taxes:
American Opportunity Credit
One of the key tax breaks for college students created in recent years is the American Opportunity Credit (formerly known as the Hope Credit). As part of the American Recovery and Reinvestment Act (ARRA), this tax break applies to any student who pays qualified educational expenses for higher education. First introduced in 2009, the tax break has been extended up through 2012. Students applying for this tax break can even list their required course materials as part of their qualifying expenses. The credit is good for up to four post-secondary years, and many students who are eligible qualify for the maximum annual credit amount of $2,500.
Lifetime Learning Credit
This credit is another tax break option for students paying for their college education. The Lifetime Learning Credit has a maximum annual credit amount of $2,000. Unlike the American Opportunity Credit, there is no limit on the number of years this credit can be claimed for each student. However, a student cannot claim both the American Opportunity Credit and the Lifetime Learning Credit in the same year.
There are also several deductions that students can take on their taxes. These deductions can make some of the biggest expenses of college more manageable. The following are the options for tax deductions for college students.
Tuition and Fees Deduction
With the tuition and fees deduction, you’re allowed to reduce your income by up to $4,000 in college expenses. Although you don’t have to itemize to take these deductions, there are some limitations. You can’t get tuition and fees deductions if you fall into any of these categories:
- You are married and filing separately.
- Someone can claim you as a dependent on their tax return.
- Your modified adjusted gross income (MAGI) exceeds $80,000 (or $160,000 if filing a joint return).
- You were a nonresident alien for any part of the year
Tuition and fees deductions can be a major tax break for many students who are paying for their qualified education expenses. The catch is that you have to choose either one of the two education credits or the tuition and fees deduction – you can’t have both.
Student Loan Interest Deduction
During college, most students are just paying the interest on their student loans. This deduction can offset those expenses in a snap. Both voluntary and required interest payments can be included. You can reduce the amount of your income subjected to taxes by up to $2,500 with the student loan interest deduction. However, your modified adjusted gross income (MAGI) must be less than $75,000 (or $150,000 if filing a joint return) in order to qualify for this deduction.
Other Tax Breaks For College Students
The credits and deductions listed above are by far the most commonly utilized by college students today. However, there are a few more tax breaks which may pertain to some college students. Find out if you qualify for any additional tax breaks like the ones listed below.
Work-Related Education Deduction
Employees who are enrolled in classes for work-related purposes may be able to claim a deduction for their educational expenses. This one is a bit trickier to obtain, however, since you must itemize your deductions. If you’re self-employed, you have to file a special form. Your classes must also pertain to work by either being required by your employer or maintaining or improving skills you use on the job. Ask a tax professional if you need help applying for this tax deduction for college students.
Child Tax Credit
Students who have children or dependents should claim a child tax credit. In addition to a daughter or son, a student can also claim stepchildren, foster children, brothers, sisters, etc. as long as they meet certain criteria.
Moving Expense Deduction
Students often have to move when they land their first job. With this deduction, students who move at least 50 miles for work can deduct the cost of moving on their tax return.
College students are eligible for several special tax breaks. However, if it’s your first time applying for these tax breaks, it’s a good idea to get help from a tax professional in order to claim them correctly. Keep in mind that if you don’t pay your own tuition or if you’re claimed as a dependent, it’s a good idea to make sure your parents or guardians are aware of these tax breaks since many of them will apply to whoever is contributing to your college expenses.