Technically speaking, educational tax credits and deductions are not part of a financial aid package, but they can be used to lessen the tax burden — this is especially useful for many online students or career changers.
Deductions reduce your taxable income and so indirectly reduce the tax you owe. For example, if you make $35,000 and are eligible for $4,000 in deductions, the tax you owe will be based on $31,000 rather than $35,000.
Tax credits, on the other hand, usually have a greater impact than deductions because credits are more direct — you can immediately apply them to what you owe the government — your tax liability. You can’t claim both deductions and credits, so it’s a good idea to know your options. See available credits here.
Tuition and Fees Deduction
The tuiton and fees deduction will reduce your taxable income by up to $4,000.This could be a good choice for someone who is ineligible for the Lifetime Learning Credit.
- Reduces your taxable income by $4,000
- Applies to education expenses such as tuition and fees (some expenses — like books — may also be covered by this deduction if they are paid to the school as a requirement of enrollment)
- Eligible for those making less than $80,000 ($160,000 for married couples filing jointly)
- Not available to married couples filing separately
Student Loan Interest Deduction
The Student Loan Interest Deduction is just what it sounds like — you can deduct up to $2,500 of interest paid on qualified student loans (loans from relatives and employers are not eligible). Note that this deduction doesn’t apply to the actual loan, just the interest.
You’ll be eligible if you make up to $75,000 ($150,000 if married and filing jointly).
Business Deduction for Work-Related Education
If you took courses required by your job or by law to keep your job, you may be able to deduct the cost of those courses.
Who is eligible? Anyone who took work-related courses, and who itemizes their deductions.
Note that the cost of the courses must make up more than 2% of your adjusted gross income. That is, if you make $40,000/year and the courses cost more than $800, you can subtract the cost from your income.
However, the education must be considered work-related by the IRS. Many vocational and career courses will qualify.
Check with the IRS or your tax advisor to learn more about any of these education tax deductions.