Tax tips for adult students
No matter what your age, paying for an education may offer you an opportunity to reduce your tax liability. Learn about some of the common tax deductions and credits available to students of all ages.
These tips will generally apply to students who are filing their own tax returns. If you are 24 or older, this probably means you, but it may also apply if you’re under 24 and aren’t claimed as a dependent on anyone else’s tax return, like a parent or a guardian.
So let’s take a look at a few of these benefits.
Tax credits can reduce the amount you owe in taxes dollar for dollar. There are two main education tax credits: the American Opportunity Tax Credit and the Lifetime Learning Credit.
Generally, you can qualify for the American Opportunity Tax Credit, or AOTC, for the first four years that you’re pursuing a degree or other recognized education credential at least part-time at an eligible college or graduate school.
With the AOTC, you could get up to a $2,500 credit on your tax bill. How much you receive will be based on a few things including your modified adjusted gross income and how much you spent on qualifying education-related expenses like your tuition, school fees, books, supplies and equipment. So keep track of these costs throughout the year.
A portion of your AOTC credit may be refundable—this is kind of a tricky tax term.
Essentially, a refundable credit can reduce your tax liability—what you owe the IRS—to below zero. In simple terms: if you owe the IRS $100 for the year and you are eligible for $200 worth of refundable tax credits, you’d have a net balance of negative $100. So, not only would you not owe taxes for the year but the IRS would also owe you a refund of $100.
But keep in mind that the AOTC credit is only partially refundable.
The other education tax credit is the Lifetime Learning Credit, or LLC, which you can qualify for in any year you’re taking courses at an eligible undergraduate, graduate, or professional school. This credit can reduce the amount of taxes you owe by up to $2,000.
Unlike the AOTC, the LLC isn’t refundable. Again, this isn’t necessarily a bad thing. A non-refundable credit will still be subtracted from what you owe in taxes, and you could still get a tax refund—it just won’t reduce what you owe in taxes beyond zero.
Also unlike the AOTC, you don’t have to be pursuing a degree or educational certificate to claim the LLC. If you’re just taking one or more courses at an eligible school to continue your education or improve your job skills or prospects, you may be able to claim this credit.
It’s important to note that even if you’re eligible for both credits, you can only claim one of them per tax year.
To claim one of these credits, you’ll need the information from your Form 1098-T, which is a tuition statement that your school should send you. Then, you’ll need to fill out a Form 8863—this is the IRS form for education tax credits—and attach it to your tax return when you file.
Your status as a student might also make you eligible for certain tax deductions. Tax deductions are different than tax credits. Tax credits directly decrease the amount you owe in taxes, dollar for dollar. Tax deductions reduce the amount of your taxable income, which may reduce what you owe in taxes by a percentage depending on your tax rate.
One education deduction you may be eligible for is a deduction of up to $4,000 of what you paid for qualified education expenses such as tuition and fees. You can take a deduction for these qualified education expenses any year you’re enrolled or taking courses at an eligible post-secondary institution by completing the IRS Form 8917 and including it with your tax return when you file.
However, you can’t claim this deduction and one of the education tax credits in the same year.
If you’re eligible for the deduction and the credits, figure out which will save you the most money. Typically the education tax credits will save you more than the education deduction.
Another education-related deduction you can take is a student loan interest deduction. If you’re paying off any student loans, you may be able to deduct up to $2,500 for the amount of interest you’ve paid on your student loan debt during the tax period. You can take this deduction even if you’re no longer in school.
Finally, if you receive money to help with your education—either from an employer or a scholarship—some of this income could be tax-free. For instance, if your employer helps pay a portion of your tuition or school expenses through an educational assistance program, the first $5,250 won’t count as taxable income.
Many scholarships are also tax-free. You can check with the providers of any scholarships you have received for more details.
These tax incentives can provide some great ways to reduce the amount of taxes you owe while you’re studying.
Of course, there are income limits that are specific to each of these credits and deductions that can affect whether you qualify. To find out more about specific eligibility requirements and to get more information on deciding which credit or deduction might be best for you, check out the information and interactive tool at IRS.gov.