Do Students Get Special Tax Breaks?

By Maurie Backman Markets Fool.com

With the price of college tuition rising faster than inflation, many students struggle to cover the cost of higher education. Thankfully, the IRS offers a number of tax breaks for students and their families. Whether you're a current student or a college grad with a mountain of debt, here are a few tax benefits you should know about.

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1. The American Opportunity Tax Credit

Unlike deductions, which simply exempt a portion of your income from taxes, credits work by directly reducing your tax liability. If you owe the IRS $1,000 and then apply a $1,000 credit, you'll knock your tax liability down to $0.

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The American Opportunity Tax Credit is a special credit designed for students and their families. It's available to students who are enrolled at least half-time within their first four years of studies. If you qualify, the credit can be worth up to $2,500, calculated as 100% of your first $2,000 in higher education costs plus 25% of your next $2,000. Furthermore, while most tax credits are non-refundable (meaning the most they can do is lower your tax bill to $0), the American Opportunity Tax Credit is up to 40% refundable, which means that if you don't owe any tax, you could get up to $1,000 issued as a refund.

As is the case with most tax credits, higher earners aren't eligible for the American Opportunity Tax Credit. But if your modified adjusted gross income (MAGI) is $90,000 or less as a single tax filer, you'll qualify for a partial credit at the very least. The same applies if you're a joint filer with a MAGI of $180,000.

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2. The Lifetime Learning Credit

If you're not eligible for the American Opportunity Tax Credit, your next best bet is the Lifetime Learning Credit, which is worth up to 20% of your first $10,000 in tuition expenses, or $2,000. The Lifetime Learning Credit offers more flexibility than the American Opportunity Tax Credit, as you don't need to be working toward a degree to claim it. Rather, you simply need to be enrolled in some type of post-secondary education.

Single tax filers with a MAGI of less than $65,000 are eligible to get a piece of the credit, as are couples filing jointly who earn less than $130,000. But unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is nonrefundable, so if you don't owe any tax and then apply the credit, it won't change your situation at all.

3. The tuition and fees deduction

Deductions tend to be less lucrative than credits because they don't directly reduce your tax bill. But if you don't qualify for either of the above credits, your next best bet is to claim up to a $4,000 deduction for tuition and fees. You can do this if your MAGI is less than $80,000 as a single tax filer or $160,000 as a couple filing jointly.

As an added bonus, the tuition and fees deduction is considered above the line, which means you can claim it even if you don't itemize on your tax return. However, you can't take the deduction if your tax filing status is married filing separately or if someone else claims you as a dependent on another return.

4. The student loan interest deduction

The average class of 2016 graduate came away with $37,172 in student debt. If you're paying off loans, you may be eligible to deduct up to $2,500 of interest, even if you don't itemize on your tax return. To qualify, your tax filing status can't be married filing separately, and you can't be listed as a dependent on someone else's return. Furthermore, you must earn $80,000 or less as a single tax filer and $160,000 or less as a couple filing jointly to at least claim a portion of the deduction.

If you paid $600 or more in student loan interest during the year, you'll get a Form 1098-E listing the total amount you shelled out. Otherwise, you'll need to contact your lender for a breakdown or consult your statements for that information. Like the tuition and fees deduction, the student loan interest deduction is considered above the line, so you don't need to itemize to take it.

The pursuit of education can be a costly endeavor. If you're a student or have one in your family, it pays to explore these tax breaks and see whether any of them can put more money back in your pocket this year.

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