Tax Benefits to Finishing Your Higher Education

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College may be expensive, but finishing your higher education makes good financial sense. A study from the Pew Research Center cited by The Economist supports the commonly held view that college graduates earn more than Americans with only high school diplomas. The study notes that graduates, ages 25 to 32, typically earn 63-percent greater salaries than their less-qualified peers. However, the financial rewards of higher education go beyond salary.

Learn more about the tax benefits available to those who complete their higher education.

Eligibility for the American Opportunity Credit

A group of graduates celebrate

The American Opportunity Credit (AOC) rewards American students for pursuing higher education, according to the Internal Revenue Service (IRS) website. Andrew Josuweit, writing for Forbes, notes this credit is sometimes called the American Opportunity Tax Credit (AOTC). The IRS website lists the following eligibility:

  • You must be within your first four years of study.
  • You must attend an eligible college or vocational school.
  • You must be enrolled at least half-time for at least one academic period during the previous calendar year.
  • You must have an income of $80,000 or less if you file your taxes as a single person, or a combined income of $160,000 or less, if you file your taxes as part of a married couple.

You may get the AOC if you were enrolled in the first three months of the current filing year if you paid qualified expenses in the previous year.

The IRS website says the AOC is worth up to $2,500 per student. If the credit raises your taxes owed to zero, you will receive a partial refund of 40 percent of any remaining credit amount up to $1,000. That extra credit can be a real benefit to students with a low tax liability, Josuweit noted.

Eligibility for the Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is another benefit that rewards students for their efforts to improve their education.

Unlike the AOC, there is no time limit for the period you can claim the LLC, according to the IRS website. You can receive it every year you pursue postsecondary education and other courses to improve your career skills. This is a real advantage for people who pursue advanced degrees like a master’s in accounting online to deepen their understanding of their industries.

To receive the LLC, you must:

  • Be enrolled in one or more courses for at least one academic period at an eligible college or vocational school during the tax year.
  • Have an income no greater than $65,000, if you’re filing as a single, or a combined income of no more than $131,000 if you file your taxes as part of a married couple.

The LLC is a maximum tax benefit of up to $2,000 per tax return per year. However, Josuweit explains in the Forbes article that this credit is not refundable. If the credit takes your tax liability to zero, you will not receive a tax refund for the surplus, as you do with the AOC.

Access to the Tuition and Fees Deduction

The tuition and fees deduction helps students reduce their taxable income while they’re studying. It can benefit students who don’t qualify for the AOC or the LLC. Students can claim this benefit even if they don’t itemize any deductions on Schedule A. You can claim this benefit if you make less than $80,000, if you’re single, or have a combined income of $160,000 if you’re filing as part of a married couple.

The IRS website states that the tuition and fees deduction offers a maximum benefit of $4,000. As it’s a deduction, rather than a credit, Josuweit explains that you won’t get a full or partial credit if your tax liability is zero. Tuition costs and other related expenses needed for enrollment or attendance can be claimed under the tuition and fees deduction.

Access the Student Loan Interest Tax Deduction

According to the most recent figures from The Institute for College Access and Success, 68 percent of American college students graduate with student loans. The average borrower owes $30,100. The student loan interest tax deduction looks to reduce those loans sooner.

If you made payments on an eligible student loan during the tax year, Josuweit says you can deduct up to $2,500 of the loan’s accrued interest when you file your tax return. If you made extra payments, you can deduct the extra interest you eliminated.

Loans must come from recognized financial institutions. You cannot claim the student loan interest tax deduction if you received your student loan from a relative, friend, or employer.

Only people filing in the single and married filing jointly categories can claim this deduction. If you file your taxes as married filing separately, you cannot claim the student loan interest tax deduction, Josuweit explains.

Your income must be no more than $80,000 if you’re filing under the single category. Your combined income cannot exceed $160,000 if you choose the married filing jointly status.

Requirements for Claiming Education Benefits

You must satisfy a number of criteria to claim your educational tax benefits.

From 2016, the IRS website states students must usually have Form 1098-T, otherwise known as the tuition statement, to claim education benefits. Your school will distribute this form to you.

You can only claim eligible educational expenses made during the previous calendar year. You can’t claim the AOC or LLC if you’re listed as someone else’s dependent, but they can claim the credits on your behalf.

Make sure you use the correct form to claim your benefits. Use Form 8863 to claim the AOC and LLC. Form 8917 is the correct form for the tuition and fees deduction, according to the IRS website. Attach your forms to your Form 1040 or 1040A.

Kathryn Dill reported in Forbes that those who earn a master’s degree in taxation have some of the highest salary potential in the United States. Taxation is a key component of a Master of Science in Accounting degree. If you want to maximize your earning potential and your tax benefits, visit the New England College website to learn more about enrolling in this exciting online degree.