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Education Tax Benefits

If you pay for the educations costs or higher education to yourself, your spouse or your dependents, you may receive various tax benefits from education deductions, credits and saving plans.

Education Deductions

Deductions are the amounts that reduce your taxable income, therefore decrease the total tax amount. There are several education tax deductions:

  • Tuition and Fees Deduction: You may be able to deduct up to $4,000 qualified expenses, for higher education, during the tax year for yourself, your spouse or your dependent (This provision will expire after the tax year 2016).

  • Student Loan Interest Deduction: You may be able to deduct up to $2,500 interest expenses that you paid on a qualified student loan. However, you will lose this tax benefit if your modified adjusted gross income (MAGI) is above $ 80,000 (or $160,000 if filling a MFJ).

  • Business Deduction for Work-Related Education: If you are self-employed, you can deduct qualified work-related education costs from self-employment income on Schedule C or F. Alternatively, if you are an employee, you can deduct unreimbursed work-related education costs as itemized deductions on Schedule A. To be more specific, the qualified education expense must help you to maintain and improve skills for the current job, but it may not qualify you for a new job or business. The allowable deduction amount, combined with other miscellaneous itemized deduction items, is subject to the 2% AGI limitation.

Education Tax Credits

Tax credits directly reduce the income tax you owed for the income tax return. There’re two types of education credits available:

  • American opportunity tax credit (AOTC): $2,500 maximum per student per year. The qualified expenses must be paid for an eligible student enrolled in an eligible education institution for the first four years.

  • Lifetime Learning Credit (LLC): $2,000 maximum per tax return per year. The credit is available to qualified tuition and fees paid for an eligible student registered at an eligible education institution for unlimited number of years.

Education Saving Plans

  • Qualified Tuition Programs (529 plans): You may deduct your payments or contributions to a QTP for qualified education expenses. The distribution of QTP is tax-free, if the distribution amount is less than the beneficiary’s adjusted qualified education expenses such as required tuitions, books and supplies.

  • Coverdell Education Savings Account (ESAs): Contributions to Coverdell ESA, limited to $2,000 per year, are not deductible. However, distributions of ESA are tax-free unless the distributions are greater than a beneficiary’s qualified education expenses. Furthermore, the contributions to Coverdell ESAs must be made before the beneficiary is 18 and the distribution must be stopped after the beneficiary reaches age 30.

Exclusion for Gross Income

An exclusion for gross income means that you don’t need to report the benefits you received on the tax return, thus it decreases your total taxable income.

  • Scholarship and Fellowship: You can exclude scholarship and fellowship from the gross income, if you, a degree candidate at an eligible education institution, use the scholarship and fellowship to pay for qualified education expenses.

  • Employer-Provided Education Assistance: You can receive up to $5,250 tax-free benefits that are paid by your employer under a qualified educational assistance plan. Your employer should not include this benefit in your wages (Form W-2), but the amounts more than $5,250 are included, which is a taxable income.

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