Tax Breaks for Education

The IRS offers a number of education tax breaks for students enrolled in an accredited college or alternative postsecondary education program. Two benefits are tax credits; two are tax deductions.

1) Tax breaks are for taxpayers. Only people who owe and pay taxes are eligible for the Hope Credit, Lifetime Learning Credit, Tuition and Fees Deduction, or Student Loan Interest Deduction.

2) Tax Credits vs. Tax Deductions. Tax credits reduce your income tax after you’ve calculated it. Tax deductions allow you deduct certain education expenses from your income before you calculate your tax.

3) Which will benefit you more, a credit or a deduction? Because the credits directly offset your tax dollar for dollar, rather than merely reducing your income, they may provide the bigger benefit. Add up your education expenses so you can figure out what will lower your tax the most, credit or deduction. (You can’t use both a credit and a deduction for the same student in the same year.)

4) To claim a tax credit, determine the tax you owe first. To use either the Hope Credit or the Lifetime Learning Credit, you first have to figure out how much tax you owe, then subtract the credit you’re eligible for from that tax amount.

5) To claim a tax deduction, deduct your education expenses first. To use either the Tuition and Fees Deduction or Student Loan Interest Deduction, deduct your eligible school expenses from your income first, then calculate how much tax you owe. Like other expenses you may deduct from your income, such as rent, property taxes, or medical expenses, the education deductions reduce your income, which could lower the amount of income tax you’ll owe. (If you’ve completed your education program but still have a student loan to pay off, don’t miss out on the Student Loan Interest Deduction.)

6) No doubling up on education tax benefits. In any one year, you can only claim the Hope Credit OR the Lifetime Learning Credit OR the Tuition and Fees deduction for the same student. You can’t claim all three, or even two out of the three. Just one credit or deduction per student, and in the case of families with more than one student in college, only one Lifetime Learning Credit per tax return.

7) Watch out for “bundled” charges on your school bill. Some schools combine all of their fees for an academic period into one all-in-one amount. To allow you to claim an education credit if you’re eligible, though, the school is required to provide you with an itemized bill or record of payment so that you can determine which fees count as qualified expenses and which don’t.

8 ) Relevant IRS Forms:

  • 1098-T: Your accredited school should send you one in early February. The 1098-T tells the IRS what the school billed you, payments they received from you, and other details related to your enrollment.
  • 8863: To calculate your education tax credit and report it on your 1040.
  • 1098-E: Student Loan Interest Statement, which you’ll receive if you paid interest on a qualified student loan during the year.

9) Have all your education expense receipts ready when you sit down to do your taxes.

10) Read all the terms and conditions related to IRS education tax breaks. For complete, detailed explanations of “qualified expenses,” “eligible school,” “academic period,” and allowable “funding sources,” “Midwestern disaster areas,” carefully read all the information on the IRS 2008 Tax Benefits for Education web site.

Source: U.S. Internal Revenue Service

Please note: This article is intended to be a general overview of an education tax benefit for the tax year 2008. EducationGrant.com does not advise on any personal income tax requirements or issues. Use of any information from this web site is for general information only and does not represent personal tax advice either express or implied. You are encouraged to visit the IRS website for more information and to seek professional tax advice for personal income tax questions and assistance.