Are there any special tax advantages for students?

Being a college student is an expensive business. The average Class of 2017 graduate, for example, walked away with $28,650 in student loans, and the average current borrower spends $393 a month on student loan repayments. The good news, however, is that there are a number of tax breaks designed to help ease the burden on students.

Tax relief for students comes in two forms – credits and deductions – and it’s important to understand the difference. A tax credit is a dollar-for-dollar reduction in your tax liability. If you are entitled to a credit of a given amount, this amount is deducted directly from your tax account. This means that if you owe the IRS $1,200, but get a $500 tax credit, your tax bill is reduced to $700.

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A tax deduction, on the other hand, allows you to exclude part of your income from tax. This means that your associated savings are a function of your tax rate, which is determined by your tax status associated with the amount of money you earn. For example, if you get a deduction of $500, you cannot subtract that amount from your tax payable. On the contrary, you simply do not pay tax on $500 of your income. If your tax rate is 24%, that saves you $120. But if your tax rate is 32%, you save $160.

In other words, a $500 tax credit is worth $500 to anyone claiming it. But the actual value of a $500 tax deduction can vary. Tax credits and deductions are claimed when you file your taxes. Any credit or deduction you are entitled to in 2019 must be claimed on your 2019 tax return, which you will actually file in 2020.

That said, here are three important student tax breaks you should know about for the 2019 tax year, which you will be filing in 2020.

1. US Opportunity Tax Credit

The US Opportunity Tax Credit is worth up to $2,500 per year for your first four years of college. To benefit from it, you must be enrolled in your studies half-time or more. (Half-time means you take six to eight credit hours per semester, while full-time means 12 or more credit hours.)

Once eligible, you can claim a credit equal to 100% of the first $2,000 you spend on educational expenses, such as tuition, books, and course materials, plus 25% of the next $2,000 you spend. However, expenses such as housing and transportation are not taken into account when calculating your credit.

Now, the numbers above might seem a little confusing, but in a nutshell, let’s say you’re spending $10,000 on tuition this year. Of this amount, you can claim your first $2,000 upfront, then 25% of your next $2,000 (i.e. $500) for a total of $2,500. It doesn’t matter that your actual expenses are well over the $4,000 mark; $2,500 is the maximum the credit will earn you.

The good news is that the US Opportunity Tax Credit is 40% refundable. Most credits are non-refundable, which means the most they can do is reduce your tax liability to $0. But depending on your situation, the US Opportunity Tax Credit could earn you up to $1,000 in the form of a refund.

However, the ability to claim the credit will depend on your income level. Many tax credits are phasing out for high earners, but if you’re enrolled in college and working at the same time, your income is unlikely to be too high to qualify.

You will qualify for the credit as a single filer if your modified adjusted gross income (MAGI) is $80,000 or less. A MAGI between $80,000 and $90,000 will give you partial credit, and you are not eligible to claim the credit once your MAGI exceeds $90,000.

If you are married and filing a joint tax return with your spouse, you will be entitled to the credit if your MAGI is $160,000 or less, and a partial credit if your MAGI is between $160,000 and $180,000 $. But you will not be eligible for the US Opportunity Tax Credit once your joint income exceeds $180,000.

2. The Lifetime Learning Credit

Like the American Opportunity Tax Credit, the lifetime learning credit will reimburse you for part of your education costs if you are eligible. The credit is 20% of the first $10,000 you spend on education costs, which means you can get up to $2,000 back when you file your tax return.

The Lifetime Learning Credit isn’t just for undergraduates in their first four years of college, though—anyone pursuing post-secondary education may qualify, depending on their income. Also, the credit is non-refundable, so while you can use it to reduce an existing tax liability, you will not receive any money from the IRS if that liability falls below $0.

As with the US tax credit, living and transportation expenses do not count toward the Lifetime Learning Credit. But tuition, course materials and books do.

As for income, you can claim the full credit if your MAGI is less than $58,000 as a single filer. The credit starts to disappear if your MAGI is between $58,000 and $68,000, and you are not eligible for it at all if your MAGI exceeds $68,000.

If you are a joint filer, you can claim the full credit with a MAGI of less than $116,000. There is partial credit for MAGI between $116,000 and $136,000, and you completely lose credit once your MAGI exceeds $136,000.

Keep in mind that you cannot claim both the US Opportunity Tax Credit and the Lifetime Learning Credit in the same year. But because the former is worth more, it’s usually advantageous to claim it over the latter if you’re eligible for it.

3. The student loan interest deduction

If you’re responsible for paying student loans, you probably know that a portion of each monthly payment goes toward interest on your loan. The bad news is that it makes your loans more expensive. But the good news is that you may be eligible to deduct up to $2,500 in student loan interest on your tax return each year.

To qualify for the student loan interest deduction, the loan in question must be in your name. You also cannot be declared as a dependent on someone else’s tax return, nor can your tax status be married by filing separately.

Keep in mind that your lender will only send you a tax form summarizing your student loan interest if you pay more than $600 in any given year. If the interest on your student loan for the year totals less than $600, you can still claim the deduction, but you will need to contact your loan officer for this information.

As with the credits above, the interest deduction on your student loan decreases as you reach higher income levels. If you are a single filer, you can claim the full deduction with a MAGI of less than $70,000. A MAGI between $70,000 and $85,000 will give you a partial deduction, but it is irrelevant once your MAGI exceeds $85,000.

Joint filers, meanwhile, can claim the full deduction with a MAGI of less than $140,000. A MAGI between $140,000 and $170,000 will result in a partial deduction, but the deduction disappears with a MAGI above $170,000.

Another thing you need to know is that most of the time you have to itemize your tax return to claim any sort of deduction. But assuming you otherwise qualify, you can claim a student loan interest deduction even if you don’t itemize, or just take the standard deduction (which most filers do) instead.

Claim these tax breaks

If you’re paying for college or paying off student loans, it’s worth knowing that tax breaks exist to help ease the burden. That said, not everyone is eligible for the above tax breaks, so if you’re not eligible, you’ll need to find other ways to make your education and associated loans more affordable. This could mean choosing a college that requires lower tuition or limiting yourself to federal loanswhich are generally less costly to repay than private loans.

Finally, remember that the rules surrounding the aforementioned tax breaks may change from year to year. You may be entitled to a credit or deduction one year but not the next, or vice versa. Be sure to consult the IRS when preparing to file your taxes so you know exactly what credits or deductions to claim.

Sarah J. Greer