It’s Tax Season – Remember to Claim Your Education Tax Benefits

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It’s that time of year again. It’s time to gather all your paperwork, W-2’s, receipts, statements, and related documents and work on completing your tax forms. With that in mind, we wanted to share a few key education tax benefits that you may want to explore so you don’t miss out on any possible deductions. You can find more detailed information in IRS Publication 970 Tax Benefits for Education. This includes all the relevant information you would need, including sample forms and worksheets.

Certain tax benefits may be available if you are saving for or have paid for educations costs. In general, most benefits apply to higher education and may be allowed for yourself (if you were the student) or for a member of your immediate family who was the student. It’s important to note that generally you can’t use the same qualifying education expense for more than one tax benefit and certain benefits may be phased out based on your income. Here are the education-related items found in Publication 970:

  • Scholarships, Fellowship Grants, Grants, and Tuition Reductions
  • American Opportunity Credit
  • Lifetime Learning Credit
  • Student Loan Interest Deduction
  • Student Loan Cancellations and Repayment Assistance
  • Tuition and Fees Deduction
  • Coverdell Education Savings Account (ESA)
  • Qualified Tuition Program
  • Education Exceptions to Additional Tax on Early IRA Distributions
  • Education Savings Bond Program
  • Employer-Provided Educational Assistance

Below, we’ll highlight the three items we think are of most general importance, but encourage you to review IRS Publication 970 for all possible benefits, and seek help from a licensed tax professional to take full advantage of education tax benefits.

  1. Student loan interest deduction

    If your modified adjusted gross income is less than $80,000 (or $160,000 if filing a joint return) and you paid interest on a qualified student loan for higher education expenses, you may be able to reduce the amount of your income subject to tax by up to $2,500.

    If the amount of interest you paid on your student loans in 2016 was $600 or more, you should receive a Form 1098-E (Student Loan Interest Statement) from your lender or loan servicer. Form 1098-E will provide you with the amount of interest you paid. There is a Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions that can assist you in calculating your deductions.
  2. Student Loan Cancellations and Repayment Assistance

    Loan Cancellation

    Typically, if a loan you are obligated to repay is forgiven or cancelled, the amount that was forgiven must be included in your gross income for tax purposes. There is an exception to this rule in instances of a loan made by a qualified lender to assist you in attending an eligible educational institution and provisions are made based on particular work capabilities.

    Repayment Assistance

    If you receive student loan payments from any of the following, those payments are not considered taxable:
    • Scholarships, Fellowship Grants, Grants, and Tuition Reductions
    • The National Health Service Corps (NHSC) Loan Repayment Program
    • A state education loan repayment program eligible for funds under the Public Health Service Act
    • Any other state loan repayment or loan forgiveness program intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).
    However, you may not deduct the interest paid on a student loan to the extent those payments were made through any of the preceding programs.
  3. Tuition and Fees Deduction

    If you paid qualified education expenses during the year for yourself, your spouse, or your dependents, you may be able to reduce the amount of your income subject to tax by up to $4,000. Just like the student loan interest deduction discussed previously, the tuition and fees deduction is claimed as an adjustment to income so you are not required to itemize in order to claim this benefit. To claim the deduction, your modified adjusted gross income can’t be greater than $80,000 (or $160,000 if filing a joint return).

    The educational institution (your college or university) may provide you with Form 1098-T which will provide payments received or billed for qualified education expenses. In addition, to claim the tuition and fees deduction, you will need to complete Form 8917 and submit that along with your Form 1040 or Form 1040A.

We hope you found the above information helpful, and we encourage you to make sure you’re aware of all the possible deductions and qualifications related to the tax benefits for education. There are a number of education related tax benefits available, and if you think you might qualify, consult the IRS website or Publication 970 for more detailed information and guidance.

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