Today, we’ll cover two birds with one stone.  A little bit about taxes ad a little bit about education- actually, the intersection of the two.  We’ll discuss tax breaks and considerations for your education and the education of your children (should you have any).

If you are going back to school to get a BS degree- or to complete your degree- and are taking at least 6 credits (semester hours) per term, you have an outstanding tax credit. (If you are not enrolled in a degree program, skip this section.)   This one is called the “American Opportunity Tax Credit”.  And, it affords you a tax credit of $ 2500 each year per student.  And, if you don’t owe $ 2500 in taxes (notice this means your taxes due don’t exceed $2500, not your payment due – which can be any amount), you can receive a check for up to $ 1000, since that portion of this credit is “refundable”.  The dollar-for-dollar credit includes tuition, books, supplies, and equipment.  (But, forget this credit if you have a felony conviction for drugs.)  One more caveat- this opportunity disappears as your adjusted gross earnings increase.  The decrease cuts in at adjusted gross income (AGI) of $80K ($160 for married filing together) and disappears completely at $90K ($180K for married filing together). If it disappears and it’s for your child- see if your child can take the credit (the child must have earned income); otherwise, check the other credits.

If you are taking graduate, undergraduate, or continuing education courses, you may avail yourself of the “Lifetime Learning Credit”, which is limited to $ 2000 for tuition and fees.   This starts phasing out at AGI of $ 51K ($102K for married couples) and is completely gone at $61K and $ 122K, respectively.

Your employer has the ability to write off tuition, fees, transportation and expenses paid on your behalf, with no income limits.  But, the course(s) MUST be related to your current position- not a new position.

Your employer may also have a 127 plan (for all employees who don’t own 5% or more of the firm), which means both it and you can exclude $ 5,250 from taxes per year for education payments- at either the graduate or undergraduate levels, and it exempts both you and the employer from payroll taxes on this amount, as well.  Note, that employers do not have to fully fund their 127 plans every year (they can forgo inclusion, if they feel their income was too low to justify their contribution).

If you have put money into a “Qualified Tuition Program” (called “529 plans”) then you can use this money for paying tuition for graduate or undergraduate programs (tuition, fees, room board, books, supplies).  It’s a little different in that taxable money is used to fund the plan ($65K per beneficiary every 5 years, and it’s not subject to gift taxes), but the money used is not taxable when employed for tuition purposes.  And, it may be possible (check your state plan) to change the beneficiary, after it’s been funded.

If you pay interest on a student loan, you can deduct up to $ 2500 per year, if the student is registered for at least 6 semester hours per term, either graduate or undergraduate. But, there’s also an income phase-out for this deduction (it closes at $ 75K and $ 150K of AGI, respectively).

You can also deduct up to $ 4000 for tuition and fees, which phases completely out by the time ones AGI exceeds $80K ($160K for married filing jointly).  This is almost a last resort, compared to the programs above.  And, you can withdraw money from an IRA (before 59 1/2 ) without the 10% tax penalty- but you will pay income taxes on the withdrawal- but that’s another last resort use of funds.

Kind of long- but that covers all the tax breaks you can take for education, as of today.

Share this: