This may not be the time of year most of us associate with going back to school, but it is definitely the season to reap education tax breaks.
If you took classes last year, either to earn a degree or just to brush up on your skills, here’s a crash course in the major tax credits or deductions you may be able to claim on your 2012 tax return.
Keep these write-offs in mind if you’re thinking of heading back to the classroom this year, too. (So far, the rules for 2013 are the same as for 2012, but the IRS promises to report any changes on its website, irs.gov.)
(MORE: 5 Ways to File Your Taxes With Less Stress)
Education Tax Credits
There are two tax credits available to people who took classes in 2012: the American Opportunity Credit and the Lifetime Learning Credit. Credits are more valuable than deductions because they let you reduce the amount of taxes you owe dollar for dollar, while deductions just reduce the amount of your income subject to tax.
Which of the two education tax credits to choose depends largely on why you enrolled, says Fred Amrein, a fee-only financial adviser in Wynnewood, Pa., who specializes in college financing.
If you were working on a four-year degree, the American Opportunity Credit could be your better option. If you took courses for other reasons and don’t qualify for the American Opportunity Credit, the Lifetime Learning Credit could be the way to go.
Either way, you’ll need to fill out IRS Form 8863: Education Credits. You can’t claim both credits in the same year. Heads up: According a recent Forbes article, some taxpayers have been confused by changes in this tax form, not realizing that they need to check the new boxes at lines 23-26. Be sure you don't make that mistake. Otherwise, if you're due tax refund, it may be delayed.
The American Opportunity Credit This credit of up to $2,500 is available to students of any age who were pursuing a college degree or other recognized credential (like a vocational school) and were enrolled at least half time. But you can’t claim it if your 2012 modified adjusted gross income; generally the same as your adjusted gross income) was more than $90,000 (if you're single) or over $180,000 if you're married and filing jointly.
If you qualify for this credit, you can write off the cost of tuition, fees, books, supplies and equipment, but not room and board or transportation.
The size of your credit is determined by adding 100 percent of your first $2,000 in eligible expenses to 25 percent of your next $2,000 in expenses.
But the maximum credit will be less than $2,500 if your 2012 modified adjusted gross income (for the sake of shorthand, future references to income in this article refer to modified adjusted gross income) was $80,000 to $90,000 and you’ll file as a single person; $160,000 to $180,000 for married couples filing jointly. If your income was within those ranges, the amount of your American Opportunity Credit is based on a sliding scale; Worksheet 2-1 on page 17 of IRS Publication 970: Tax Benefits for Education, shows how to calculate it.
(MORE: Can You Claim Your Adult Children on Your Taxes?)
The Lifetime Learning Credit This credit of up to $2,000 is available for post-secondary education in 2012 as well as for courses to improve your job skills or acquire new ones, even if you weren’t working toward a degree. You can’t claim this credit, however, if your 2012 income was more than $62,000 and you’ll file as a single person or over $124,000 if you were married and filing jointly.
Tuition and fees are eligible expenses, but books, supplies and equipment qualify only if you paid them directly to the school as a condition of attendance.
Your credit is determined by multiplying your first $10,000 in eligible expenses by 20 percent. The size of the tax break is reduced if your 2012 income was $52,000 to $62,000 and you’ll file as a single person or $104,000 to $124,000 if you were married and will file jointly.
Tax Deductions for Education
If you borrowed money last year for your education or paid the costs out of savings, you may be eligible for one of three tax deductions on your 2012 return:
Tuition and fees deduction If you don’t qualify for either of the above credits, you can claim this tax break for attending a college or vocational school in 2012 as long as your income was under $80,000 and you were single or under $160,000 and you were married and will file jointly.
You can deduct up to $4,000 if your income was $65,000 or less and you were single; $130,000 or less if you were married and will file jointly. The maximum deduction is $2,000 if your income was $65,000 to $80,000 (single) or $130,000 to $160,000 (married filing jointly).
You don’t need to itemize on Schedule A to claim this deduction; it’s reported as an adjustment to income on Form 1040 or 1040A. You will, however, need to fill out Form 8917: Tuition and Fees Deduction.
Student loan interest deduction If you were enrolled at least half time in a degree program last year and took out a student loan to pay for it, you could be eligible to deduct up to $2,500 of the interest if your income was under $75,000 (single) or under $155,000 (married, filing jointly).
(MORE: Why I Went Back to College)
You get the full deduction if your income was under $60,000 (single) or $125,000 (married, filing jointly) and a partial deduction if it was $60,000 to $75,000 (single) or $125,000 to $155,000 (joint). Publication 970 explains how to calculate the size of your deduction.
Business deduction for work-related education You may be able to deduct the cost of tuition, books, supplies and transportation if you took courses to maintain or improve your job skills or because your employer required you to do it (and you’ll itemize on your 2012 return).
There’s one catch: If you were an employee in 2012, you can claim only work-related education expenses to the extent they and other “miscellaneous” deductions (like a tax preparation fee and safe-deposit box rental) exceeded 2 percent of your adjusted gross income.
If you were self-employed, there’s no threshold. You can deduct your work-related education expenses no matter how much they were.
A Tax Break to Consider for 2013
The 529 college savings plan has become a popular tax-favored tool for parents to finance their children’s education, but adult learners can have one, too. If you’re planning to take classes this year, you might want to open a 529.
With a 529, you invest money for college or grad school and the earnings grow tax-deferred. Withdrawals are tax-free as long as you use them for education. Many states also let you deduct some or all of your 529 contributions on your state income tax return if you use their plan; a few let you deduct contributions to other states’ plans.
Incidentally, if you have money left over in a 529 plan that you set up for your child, you can use that cash for your own education by changing the beneficiary on the account.
Greg Daugherty is a personal finance writer specializing in retirement. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.
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