Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
The Government allows you a number of educational deductions and credits. The American Opportunity Credit and the Lifetime Learning Credit covered previously are two of them. There are several other educational tax benefits to also consider:
- Education Costs as Business Expenses
- Education Savings Bonds
- Scholarships and Fellowships
- Tuition and Fees Deduction
- Student Loan Interest Deduction
Education Costs as Business Expenses (1040, Schedule ‘A’ deduction):Job Requirements
- You must be working.
- You must be able to itemize your deductions (Schedule A) if you are an employee, or you must be self-employed.
- You must have qualifying work-related education expenses.
- Must be required by your employer to keep your present salary, status, or job, or
- Must be required by law to keep your present salary, status, or job, or
- Must help you maintain or improve skills needed in your present job.
Work-related education courses are deductible even if the education could lead to a degree.Non-Qualified Educational Requirements: (Non-Deductible)
- If the courses are needed to meet the minimum educational requirements for your present (or first) job.
- To get a job in a new trade or business.
For Example: the bar exam is not deductible, nor are the medical boards. Courses an accountant takes which although used in his practice, but also leads to the ability to take the bar exam, are not deductible.To summarize
: If you have to take it to keep your present job, it’s deductible; if you must take the courses to be promoted to a higher position, it is not deductible.
If any of this applies to you, check out IRS Publication 970 [PDF], chapter 12.Loophole
: Although you may not be able to deduct these expenses as a business expense, they may qualify under the Lifetime Learning Credit! IRS Publication 970 [PDF], Chapter 3.
Education Savings Bonds
Savings bonds are safe, secure, tax-deferred for Federal purposes (until cashed-in or matures), and non-taxable by your state and local governments.Loophole
: If used for education, they may not be taxed by Uncle Sam either!Bond Requirements
- Series EE bonds issued after 1989, or Series I bond.
- Must have been issued either in your name (as a sole-owner), or in the name of both you and your spouse (as co-owners), Bonds registered in your child’s name do not qualify.
- The owner must be at least 24 years old before the bond’s issue date (as stated on the bond).
- Expenses must be for you, your spouse, or a dependent you claim on your tax return.
- Income Limits: Your modified adjusted gross income must be less than $85,100 ($135,100 if married filing jointly or a qualifying widow(er)
- You filing status in not married filing separately.
- Required tuition and fees.
- Room and board do not qualify.
: You can roll-over these bonds into a state 529 plan, or to a Coverdell education savings account, and not pay taxes on the bond interest!
If you have any of these bonds, check out IRS Publication 970 [PDF], chapter 10. If in doubt, let your tax guy figure it out.
Scholarships and Fellowships
Scholarships, fellowships, grants, and tuition reductions are great non-taxable educational assistance forms. Right? Wrong!
If you are a degree candidate, then tuition, fees, books, supplies, and equipment required of all students in the course are tax-free; room, board, and travel are taxable. If you are not a degree candidate, then all of your payments are taxable.
What about if you have to work for this money? May be taxable. And if you win a scholarship prize? Yep, may be taxable.
So even if you do not receive a W-2 for the taxable portion, don’t forget to include it in on your tax return.
If any of these programs apply to you, read IRS Publication 970 [PDF], chapter 1. And yes, this also applies to athletes.
Before the tax season, contact your preparer to find out if taxes are in your future.
Tuition and Fees DeductionSummary
- Maximum benefit: $4,000.
- Income Limit: $80,000 if single, head of household, or qualifying widow(er) ($160,000 if married filing jointly.
- Cannot claim if you file married filing separately.
- You do not need to itemize for this benefit.
- Expenses are for you, your spouse, or dependent.
- Qualifying expenses include required tuition and fees, not room or board, insurances, or medical expenses.
- Cannot also claim the American opportunity or lifetime learning credit for this student.
- Cannot claim this deduction if you
be claimed as a dependent (even if you are not).
Of course there are other restrictions and exceptions, so review this with your tax preparer before the tax season.
As noted you cannot claim this deductions as well as either the American opportunity or lifetime learning credit for the same student. To get the highest benefit, on your Federal as well as State and local return, you must compute the savings under all scenarios.
Take a few minutes to review IRS Publication 970 [PDF], chapter 6.
Student Loan Interest DeductionSummary
- Maximum benefit: $2,500
- Qualifications: Loan must be
for qualified education expense, and not from a related person or qualified employer plan. You must be legally obligated to make the interest payments. Loan origination fees are not deductible.
- Student Qualifications: For you, your spouse, or dependent, and enrolled at least half-time in a degree program.
- When Deductible: When paid – over the life of the loan.
- Income Limit: $75,000 if single, head of household, or qualifying widow(er) ($150,000 if married filing jointly.
- Cannot claim if you file married filing separately.
- Qualifying Expenses: Tuition, fees, room and board, books, supplies, equipment, transportation.
Source: IRS Publication 970 [PDF], chapter 4.
(Remember, you owe it to yourself to become a success. Of course after that, you owe it to the IRS.)
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.