Taxes & Education
Offset the Cost of Education By Claiming These Tax Breaks on Your 1040 Return
Everyone knows that education costs money and tuition is expensive. However, what everyone doesn’t know is that there are numerous education tax benefits made available by the federal government. Claiming an education tax credit or tax deduction on your tax return can help offset the high cost of education.
Here’s a breakdown of the best federal tax benefits for education.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is an education tax benefit that allows taxpayers a credit of up to $2,500 if they paid the qualifying educational expenses for an eligible student. The eligible student may be themselves, their spouse, or their dependent. This education tax credit can be claimed based on the same student’s expenses for up to four tax years.
Lifetime Learning Credit (LLC)
The Lifetime Learning Tax Credit is an education tax benefit that allows taxpayers a credit of up to $2,000 for the qualified tuition and educational expenses of a student. This tax credit is nonrefundable and it applies to students at the undergraduate and graduate levels. To qualify, the student must be part of the taxpayer’s family – either the taxpayer themselves, their spouse, or a dependent – and enrolled in an eligible educational institution.
RELATED: The Expanded Child Tax Credit (CTC)
Student Loan Interest Deduction
The Student Loan Interest Deduction is an education tax benefit that allows taxpayers to deduct up to $2,500 of the interest paid on student loans. This education tax deduction can be claimed on your federal income tax return to reduce your taxable income.
RELATED: Top 5 Tax Deductions for Individuals
Employer-Provided Educational Assistance
You may exclude certain educational assistance benefits from your income when you prepare your tax return. That means that you won’t have to pay any tax on those benefits. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Lifetime Learning Credit.
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. There are no MAGI limits for this tax exclusion.
RELATED: The Earned Income Tax Credit (EITC)
Gift Tax Exclusion for Tuition Expenses
In general, any gift is a taxable gift and the donor is responsible for paying the gift tax. However, there is an annual gift tax exclusion that allows a person to gift up to $15,000 per year to a recipient without incurring the Gift Tax. The direct payment of someone else’s tuition expenses is not considered a taxable gift, and is therefore exempt from the Gift Tax.
Business Tax Deduction for Work-Related Educational Expenses
If you are an employee and can itemize your deductions, you may be able to claim a tax deduction for the expenses you pay for your work-related education. An itemized deduction may reduce the amount of your income subject to tax.
Your deduction will be equal to the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income (AGI). If you are self-employed, you can deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and Self-Employment Tax.
To claim a business deduction for work-related education, you must:
- Be working
- Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee
- File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed
- Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education
RELATED: Top COVID-Related Tax Breaks