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Aug 06 2012
Are education expenses deductible?

Posted in general

With kids headed back to school this topic is forefront on the minds of many people.  This article will provide a brief overview of some of the education benefits that may be available.

Recent legislation allows a tax credit and/or deduction to many adults enrolled in classes or seminars.  There are effectively two education tax credits and two above the line deductions available for education expenses.  The two credits are the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (LC).  There is also a third called the HOPE credit, but the AOTC is more favorable and was meant to replace the HOPE credit through at least 2012.  If changes are not made during current legislation then the AOTC will no longer be allowed beginning in 2013.  The two deductions are for education expenses and interest paid on student loans.

The AOTC is a partially refundable $2500 per student per year credit.  It may only be used for the first four years of undergraduate education at an eligible educational institution.  The LC is a non-refundable $2000 per student per year credit.  It may be used for any post-high school education at an eligible education institution.  Both credits phase out for taxpayers with high AGI.  Both credits cannot be used for the same student in the same year.

The tuition and fees deduction is an above-the-line deduction of up to $4000 for tuition and fees required for enrollment at an eligible educational institution.  You may not take the deduction for books, supplies, etc. and you cannot claim the deduction in a year that you use a credit for the same student.  The student loan interest deduction is an above-the-line deduction of up to $2500 per taxpayer per year.  If you are currently paying back a student loan then the interest portion of those payments may be deductible.

If your AGI is too high you may still be able to deduct the cost of education expenses if they are related to your trade or business or employment.  If you have incurred education expenses that maintain or improve your skills related to your current position then the costs can be deducted either on schedule A or directly by your business.  If the education is for minimum standards to obtain a job, or if it could qualify you for a different trade or business, it would not be deductible even if it also improves your skills in your current position. 

Education savings accounts provide an alternative you might take advantage of in order to pay your education expenses.  These require some tax planning to be beneficial.

Last Updated by Admin on 2012-08-06 11:26:10 AM