30 Resources for Tax Savings from Educational Expenses

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Since 1978, the cost of university tuition and fees have jumped %1,120. That’s roughly 5 times faster than the increase in the price of food over the same period. But like they say, it takes money to make money. And the price of not obtaining some higher education is also at an all-time high. That’s not to say you can’t save yourself a solid wad of cash by being savvy. There are a number of ways in which you can translate educational expenses to lowered tax bills, or–in the event that you won’t owe taxes–a refund to help with your education. While the definitive resource should always be the IRS, below are a number of resources that can help to give you a basic outline of how educational expenses and taxes affect each other. Though it’s hard to get education for free, we hope the following guide helps to at least make your educational expenses more affordable.

1. The American Opportunity Credit offers a tax credit of up to $2,500 for eligible course expenses, tuition, and even books through your first four years of higher education.
   • While the American Opportunity Credit is available to most taxpayers if they, their spouses or dependents are endeavoring upon one of their first four years of higher education, it’s worth checking to see if the American Opportunity Credit is the only credit you’re eligible for.
   • Wondering where to file for this deduction? If you’re a student at an accredited institution, you should receive a Form 1098-T detailing how much you paid in tuition. Use this measure to fill our Form 8863 the form for the American Opportunity Credit and the Lifetime Learning Credit.
2. The Lifetime Learning Credit is a go to educational deduction that families with a modified adjusted gross income of $52,000 or less ($104,000 if married and filing jointly) can take full advantage of. In its full amount, the tax credit is worth 20% of the first $10,000 in tuition paid by a taxpayer during a given year.
   • The American Opportunity Credit and the Lifetime Learning Credit can be easy to confuse. If you’re wondering which is the best fit for your personal income level and educational-expense amount, check out this handy comparison guide put out by the IRS.
   • Wondering where to file for this deduction? Check out Form 8863 into which you should file the amount of tuition noted by the Form 1098-T a measure of tuition paid sent by an institution to a student by January 31st.
3. The Tuition and Fees Deduction offers up to a $4,000 deduction on qualified educational expenses for yourself, your spouse, or a dependent. This deduction is often a good deduction for those whose income is too high to qualify for the Lifetime Learning or American Opportunity Credits.
   • Not sure if your educational expenses qualify? Check out this TurboTax FAQ on the tuition and fees deduction to find the answer to many common questions regarding the deduction.
   • This quick rundown from FAFSA offers an education-specific look at the deduction and is updated regularly.
   • Wondering where to file for this deduction? Check out Form 8917–which you should file with your 1040 or 1040A– or check out the IRS’s informational page on the Form 8917 if you need more information.
4. The Student Loan Interest Deduction adjusts income of those with modified adjusted gross income of $80,000 or less ($160,000 if married filing jointly) by up to $2,500 based on the interest on student loans paid.
   • Though income thresholds as well as the amount you can potentially deduct have changed slightly over the last two years, check out this 2013 student loan interest deduction calculator to get a ballpark of how much you can save.
   • Wondering where to file this deduction? There should be instructions for deducting eligible student loan interest in your Form 1040, Form 1040A, or Form 1040NR.
5. The Business Deduction for Work-Related Education offers the ability to deduct the total amount of work-related educational expenses, plus other work-related expenses that top 2% of your adjusted gross income.
   • If you’re self-employed or an employer, the business deduction for work-related education can be a great way to both further business skills as well as decrease your tax bill. Check out this guide on the tax implications of furthering employee education by Biz Filings.
   • If you’re wondering how to file for this deduction, check out forms 1040 or 1040NR, forms 2106 or 2106-EZ if you’re an employer, or Schedule C, Schedule C-EZ, or Schedule F on Form 1040 if you’re self-employed.
6. 529 Plans allow parties to set aside money for chosen beneficiaries for educational expenses including room and board. While contributions aren’t tax-deductible, most earnings on money in 529 plans aren’t taxed. Plans are offered by individual states or academic entities.
   • 529 plans have become relatively mainstream tools for higher education saving and planning. If you would like an outside perspective on what 529 plan is best for you, check out US News’ guide on 529 plans.
   • Wondering how to file 529 plans and their earnings? Your 1099-Q should show the distribution of your earnings for your 529 plan. For a more general overview check out this article on record keeping for your 529 plan.
7. Coverdell Educational Savings Accounts are limited by income and no more than $2,000 may be contributed in a given year, but allow greater flexibility than 529 plans through allowing account holders to save for both K-12 and Higher Education expenses.
   • Wondering how exactly Coverdell Savings Accounts stack up against 529 plans? Check out this guide introducing the basics of Coverdells, comparing them to 529 plans, and sharing valuable tactics for getting the most out of your educational savings accounts.
   • Wondering how to file changes in Coverdell Educational Savings Account amounts? Both losses and gains in the account may be filed on Forms 1040 or 1040-NR
8. Scholarships, Fellowships, or Grants are generally tax free, and perhaps the most surefire way to reduce taxes owed on income used to pay for education.
   • While most scholarships, fellowships, and grants that are used for tuition, room and board, and related educational expenses are tax-deductible, some aren’t. Check out this guide by FinAid.org for a general overview of which scholarships, fellowships, and grants may or may not be tax-deductible.
   • For scholarships, fellowships, or grant amounts that are taxable, amounts may be included in the space to the left of the ‘wages, salaries, and tips’ line on your Form 1040, Form 1040A, or Form 1040-EZ. For filings using the Form 1040NR or Form 1040NR-EZ, the amount may be included on the line for ‘scholarship and fellowship grants.’
9. Educational Assistance Benefits Programs from your employer allow you to exclude up to $5,250 in educational assistance per year. Meaning that you do not include up to that amount as income, wages or tips from your employer.
   • While employer educational assistance programs are great, they take some research to figure out exactly how they’re going to affect your tax status. Check out the StraighterLine.com’s guide on four crucial steps to using your employed educational assistance program for some general information on the process.
   • Generally all amounts of educational assistance from employers over $5,250 are taxed as ‘fringe benefits’ and documented on your W-2 or W-3. Generally these benefits are filed on Forms 1040 or 1040-NR.
10. Overview Resources:
    • Perhaps the most comprehensive overview resource on potential tax benefits for education can be found in the IRS’s Tax Benefits for Education Information Center. Check out this in-depth resource here.
    • Last published for 2014, ‘publication 970, tax benefits for education’ is the definitive code for all of your detailed questions regarding how education expenses will affect your taxes. Check it out here.