The cost of a university education continues to rise. There are tax credits and deductions available which may help reduce these costs. A tax credit directly reduces the tax owed. A deduction is a reduction to income which could result in a lower tax. Following is a list of the most common educational benefits.

Tax Credits

There are two credits available; the American Opportunity Tax Credit and the Lifetime Learning Credit. Taxpayers who qualify can choose either of the two credits, but cannot use both credits on a single return for the same student.

To be eligible for either of the credits the taxpayer must meet the following requirements:

1. The taxpayer, a dependent or a third party paid qualified education expenses for post high school education with cash, check, credit or debit card, or proceeds from a loan. The expenses must be paid for an academic period that begins during the tax year for which the credit is being claimed or within three months of the following tax year. The qualified education expenses must be reduced by the amount of any tax-free scholarships, grants, fellowships or other tax-free funds (except gifts and inheritances) received by the student. What constitutes a qualified education expense differs based on the credit being claimed. Further details regarding qualified education expenses appear below.

2. An eligible student must be enrolled in an eligible educational institution. An eligible institution is a college, university, trade school or other post-secondary educational institution eligible to participate in a student aid program run by the US Department of Education. The institution can be public, non-profit or private-for-profit.

3. The eligible student is the taxpayer, the taxpayer’s spouse, or a dependent listed on the taxpayer’s tax return.

American Opportunity Credit

• Provides a maximum yearly benefit of $2,500 per eligible student.
• Is only available for the first four years at an eligible college or vocational school.
• Is available to students pursuing a degree or other recognized educational credential.
• Qualified education expenses are tuition, fees, activity fees and other related expenses required to be paid by the student to enroll or attend an eligible education institution. Books, supplies and equipment needed for a course are also qualified education expenses even if purchased from an off-campus bookstore. Expenses for sports or other non-credit courses are not qualified education expenses unless required, or are part of, the student’s degree program.
• Is partially refundable up to a maximum of $1,000.

Lifetime Learning Credit

• Provides a maximum yearly benefit of $2,500 per return.
• Is available for all years of post-secondary education which leads to a degree or other recognized education credential and for courses to acquire or improve job skills.
• Is available for an unlimited number of tax years.
• Qualified education expenses are tuition, fees, activity fees and other related expenses required to be paid by the student to enroll or attend an eligible education institution. Books, supplies and equipment needed for a course are also qualified education expenses only if required to be paid directly to the school as a condition of enrollment. Expenses for sports or other non-credit courses are qualified education expenses if the course helps the student acquire or improve job skills.

Tax Deductions

Student Loan Interest

• An eligible student may deduct interest paid on a qualified student loan to pay for qualified educational expenses so long as the filing status on the return is not married filing separately.
• A qualified loan is one which:

-Was taken solely to pay for qualified educational expenses of the

taxpayer, the taxpayer’s spouse or the taxpayer’s dependent.

-Was used to pay for qualified educational expenses incurred within a

reasonable period of time before or after obtaining the loan.

-Was used for education provided during an academic period for an

eligible student.

-Is not from a related party or qualified employer plan.

• Qualified educational expenses are the total costs of attending an educational institution, including graduate school. These expenses include:

-Tuition and fees

-Room and board

-Books, supplies and equipment

-Other necessary expenses, including transportation

• The maximum amount which may be deducted is $2,500 yearly.
• The deduction is not an itemized deduction. It is an above the line deduction which reduces gross income.
• The full deduction is available to taxpayers whose modified gross income is $85,000 ($170,000 for taxpayers filing as married filing jointly). The deduction is phased out for taxpayers above these income limits and is fully phased out when modified gross income exceeds $100,000 ($205,000 for taxpayers married filing jointly).

Work Related Education

Employees who incur expenses for work-related education may be able to deduct these expenses. However, these expenses are itemized deductions and only the portion exceeding 2% of adjusted gross income is deductible. Self-employed individuals who incur expenses for work-related education can deduct the expense directly from their self-employment income. It is possible that the work-related expenses may qualify for the Lifetime Learning Credit or the American Opportunity Credit. However, the same expenses cannot be used to qualify both for the work-related deduction and an educational credit.

Work-related education is education that meets at least one of the following two tests:

• The education is required by the taxpayer’s employer or the law to keep the taxpayer’s present salary, status or job. The required education must serve a bona fide business purpose of the employer.
• The education maintains or improves skills needed in the taxpayer’s present work.

• Even if the education meets one of the two tests, it is not considered work-related education if the education:

• Is needed to meet the minimum educational requirements of the taxpayer’s current trade or business or

• Is part of a program of study that will qualify the taxpayer for a new trade or business.