Tax Breaks for College Students
March 2009—The annual tax season may be unavoidable, but it has its advantages. If you're enrolled in a higher education program, or if you're considering going back to school this year, you'll be glad to know that the IRS offers a number of tax breaks for college students:
Tax Credits vs. Tax Deductions
The first two benefits are credits, which reduce your income tax after you've calculated it. The second two benefits are deductions, which allow you deduct certain education expenses from your income before you calculate your tax.
Because the credits directly offset your tax dollar for dollar, rather than merely reducing your income, they may provide the bigger benefit. Spend some time adding up your education expenses so you can figure out what will lower your tax the most, credit or deduction. (You can't use both for the same student in the same year.)
To Calculate Credits: Figure out your tax 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.
To Calculate Deductions: Deduct your expenses first
To use either the Tuition and Fees Deduction or Student Loan Interest Deduction, you deduct your eligible school expenses from your income first, before you 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.
Don't miss out on the Student Loan Interest Deduction
If you've completed your education program but still have a student loan to pay off, be sure to take advantage of the student loan interest deduction.
9 Tax Break Tips
1) Tax breaks are for taxpayers. Only people who pay taxes are eligible for the Hope Credit, Lifetime Learning Credit, Tuition and Fees Deduction, or Student Loan Interest Deduction.
2) Be prepared. Collect all your education expense receipts so you have them handy when doing your taxes.
3) IRS Forms you'll need besides the 1040:
- 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 credits and report them 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.
4) No doubling up on 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 for each student, and in the case of the Lifetime Learning Credit, only one credit for each family.
5) Eligible schools defined. To be eligible for the credits or the tuition and fees deduction, the school you attended has to be an eligible educational institution, which the IRS defines as any college, university, vocational school, or other postsecondary educational institution eligible for federal financial aid from the U.S. Department of Education. In other words, virtually all accredited public, nonprofit, and for-profit postsecondary institutions.
6) Academic period defined. An "academic period" is a semester, trimester, quarter, or other period of study (such as a summer school session) that began in 2008 or in the first 3 months of 2009.
7) Qualified expenses defined. "Qualified expenses" typically include tuition, fees, and some related expenses. "Related expenses" include some student participation fees and money for course-related books, supplies, and equipment, but only if the fees and expenses must be paid to the school as a requirement of enrollment or attendance. "Qualified tuition and related expenses" are the same for the Hope Credit and the Lifetime Learning Credit.
Unfortunately, even if the school requires you to have the following items as a condition of enrollment or attendance, the IRS does not allow you to count them qualified education expenses. They are:
- Medical expenses (including student health fees)
- Room and board
- Transportation expenses
- Personal living or family expenses
8) Funding Sources. Education expenses that you paid with money from these sources count as qualified expenses:
- Student loan (financial aid)
- Earnings or wages
- Gifts of money
- An inheritance
- Personal savings
But, education expenses that you paid with tax-free student assistance cannot be counted as qualified expenses. Tax-free funds include:
- The tax-free parts of scholarships and fellowships
- Pell grants
- Employer-provided tuition assistance
- Veterans' education funding
9) Beware all-in-one "bundled" charges on your school bill. Some schools combine all of their fees for an academic period into 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 are the qualified expenses and which are not.
Source: U.S. Internal Revenue Service, IRS online
Please note: This article is intended to be a general overview of education tax benefits for the tax year 2008. Avenue100 Media Solutions Inc. and CourseAdvisor.com do 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.