Knowledge is power, but knowledge is also money. Or to put it more precisely, knowledge costs money. Going to school can be a major drain on your bank account, so it’s good news that you can deduct at least some of that from your taxes. Here’s everything you need to know about how to track and deduct educational expenses when filing your taxes.
Tracking your education expenses
If you’re currently enrolled in school (or were last year), you should get a Form 1098-T from your school in January. This form shows tuition and other educational expenses you paid in the previous year.
But don’t forget things like textbooks, lab fees, and school supplies. It’s best to create a spreadsheet or other tracking system and record all your school expenses throughout the year, so you won’t get caught scrambling when tax season rolls around. After all, if you can’t remember how much you paid, you can’t get the full deduction you’re owed!
Deducting student loan interest
If you made any student loan payments last year, you may be able to deduct the interest from your taxable income. If your payments totaled more than $600 in interest, your student loan servicer should automatically send you Form 1098-E with the relevant information on it. If your interest totaled less than $600, you should still deduct that on your taxes, but you may have to request the form specifically from your servicer.
The American opportunity credit
If you’re an undergraduate student, you can claim this deduction for up to four years, as long as no one claims you as a dependent on their tax return. (If they do, they’ll claim the credit). This credit lets you claim the first $2000 spent on tuition, books and supplies, and school fees, plus 25% of the next $2000. It’s important to realize that you can only count expenses directly related to school, not things like food, living expenses, or transportation.
For example, let’s say you’re a college undergraduate who spent $5000 total on tuition, books, and supplies in the past year. You’d be able to deduct $2000 of that, plus $500, for a total of $2500.
You can still claim part of this credit (40% up to $1000) even if you had no income last year and/or don’t owe taxes. Yes, you heard that right.
Lifetime learning credit
Unlike the American opportunity credit, you can claim this one wherever you’re at in your schooling, and there’s no limit to the number of years you can do so. This makes it a great credit for grad students. Just note that you can’t claim both the lifetime learning and American opportunity credit in the same year.
This credit lets you claim 20% of the first $10,000 paid toward tuition and fees last year. Again, things like transportation, food, and living expenses don’t count. For instance, if you paid $10,000 in tuition, you’d be able to claim $2000.
To claim this credit, your MAGI (Modified Adjusted Gross Income) must be less than $59000 if you’re filing singly, $118,000 if filing jointly. If your MAGI is between $59,000 and $69,000 (or $118,000 and $138,000 if filing jointly), you can still claim a reduced credit.
Education assistance funds
Maybe you work for a company that gives you funds for educational assistance, such as reimbursing your tuition or contributing toward your student loan payments. Do you have to count that as part of your income? Not necessarily. You can exclude the first $25250 from your taxable income. After that, the rest will count toward your taxes.