Tax Deductions and Credits for Students
Tax season is upon us—and it’s crucial to get the most in your deductions possible. As a student, you’re eligible not just for deductions, but for certain tax credits that can lower your tax bill dollar for dollar—not just by a percentage. Here are a few deductions and credits especially for students.
Please note that we are not tax professionals, and you should consult a professional to find out which deductions and credits apply specifically to you.
Student loan interest—including the interest paid by your parents
You can deduct all student loan interest for student loans taken out in your own name. But most students don’t realize they can also deduct the interest on loans their parents take out for their child’s education—even if you’re not claimed as a dependent. That’s because the IRS treats the interest as though it was given to you, then paid by you to the loan. You can deduct up to $2,500 in student loan interest paid by your parents in this way.
If you’re a parent who puts your kids in child care while you go to school (or while you go to work or anywhere else, for that matter), you can claim a credit for the amount you spend on child care. A credit is different from a deduction because it lowers your tax bill dollar-for-dollar, rather than reducing your income and thus reducing your tax bill only by a percentage of what the child care actually costs.
You can also claim a credit for up to $5,000 in child care expenses spent through a reimbursement account at work—plus an additional $1,000 for expenses you had to pay in excess of what’s reimbursed, for the care of two children or more.
Tuition, fees, books, supplies and equipment
This includes textbooks, computers, Internet connections, pens and pencils, and anything else you need to go to school or get access to online classes. There are several different types of credit programs that the federal government is offering to lessen the burden on students. All more or less allow you to deduct the same things, but with different amount limits and conditions. These include:
The American Opportunity Tax Credit
This is a credit, not a deduction—so you can reduce your tax bill dollar-for-dollar for everything you spend on tuition, fees, books supplies and equipment in the first four years of study. It applies to the 2009 and 2010 tax years only, and is a replacement for the Hope credit—with more generous terms—authorized as part of the economic stimulus bill.
Even if you have no income and owe no income tax, you can still get the credit—so the IRS might send you a check. You can get up to $2,500 under this credit and up to $1,000 refunded if you owe no income tax. The amount you qualify for varies depending on how much you make ($90,000 modified adjusted gross income for singles and $180,000 per couples). You must have been enrolled at least part-time in 2009 in an accredited degree, certificate or program leading to a recognized credential.
The Hope Credit
The Hope credit allows you to deduct for the same things—education costs like tuition, fees, equipment and books—up to $3,600 per student—for the first two years of undergraduate study. It also includes a room and board allowance. But you can deduct only expenses required to be paid to the school for equipment—so if you buy a computer on your own, it’s not included. The tax credit is also nonrefundable—the most you can get is limited to the amount of taxes you owe. This credit is meant to be replaced by the American Opportunity Tax Credit for the 2009 and 2010 tax year, so you can’t apply for both—unless you happen to be attending a school located in a Midwestern disaster relief area. In that case, you may qualify for both.
Lifetime Learning Tax Credit
This one is different from the preceding two tax credits, in that you can apply for all kinds of postsecondary education—not just undergraduate. It’s designed to be used when you’ve already exhausted your eligible options for the other two credit programs, which provide slightly more advantageous terms.
Under this program you can claim up to $2,000 per tax return, not per student, up to $4,000 total. It’s nonrefundable—so you only get back in proportion to what you pay in taxes. You can deduct tuition, fees, and amounts the school itself requires you to pay for books, supplies and equipment—so anything you spend on your own for these things isn’t eligible.
You don’t have to pursue a degree to get this credit—you can use it for continuing education—and you can use it for all years of postsecondary education. Unlike the first two credits, you qualify for this one even if you’ve been charged with a felony drug conviction.
Don’t get screwed in your taxes this year. Deduct your college expenses and claim all the credits you’re eligible for—and hopefully your tax burden will be lighter.
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