Education Tax Benefits
The tax code is filled with many different types of tax benefits relating to education. These tax benefits are in the form of deductions, credits, and excludable income. These tax benefits are related to paying for higher education or in some cases paying for continuing education. There are many types of education related benefits in the tax code. To numerous to mention here. Therefore we will discuss the three most common benefits in more detail in this newsletter.
Education Deductions:
Taxpayers are entitled to deduct interest paid on student loans. These loans must have been used for secondary education at an accredited school. The maximum amount that a taxpayer can deduct for student loan interest for 2015 is $2,500. However, this interest deduction gets phased out once a taxpayer’s for single filers AGI exceeds $65,000 and gets completely phased out once AGI exceeds $80,000. For joint filers the interest gets phased out once AGI exceeds $130,000 and completely phased out once AGI exceeds $160,000.
Another common education deduction is for continuing education. This deductions is usually paid for by an employee who is currently employed and needs to have a certain amount of education in order to stay employed and keep current on his or her qualifications. There are two basic requirements in order to deduct expenses related to continuing education. First, the expenses have to be related to the type of work that you perform. The expenses cannot be for any unrelated work or for new qualified work. The second requirement is that the education expenses have to be required in order for you to retain your job.
Tax Credits:
There are two basic types of education tax credits. There is the American Opportunity Tax Credit and the Lifetime Learning Credit. Both of these credits are for paying tuition towards higher education. With the American Opportunity Tax Credit a taxpayer can receive a maximum credit up to $2,500 per year for four years of higher education. The credit is calculated by taking 100% of the first $2,000 in tuition expenses plus 25% of the next $2,000 in tuition expenses. The credit gets completely phased out one taxpayer’s AGI exceeds $180,000. If a taxpayer does not qualify the American Opportunity Tax Credit then the taxpayer may take the Lifetime Learning Credit. This credit is calculated by multiplying a taxpayer’s first $10,000 in tuition by 20% for a maximum credit of $2,000 per year. This credit gets completely phased out once a taxpayer’s AGI exceeds $130,000 for joint filers and $65,000 for single filers. For both of these credits tuition is the only expense that can be applied towards the credit. You cannot take room & board, books, or other fees.
Excludable Income:
The tax code has two prescribed tax shelters in which the income can be tax free relating to education. These two types of tax shelters are the Education IRA (Cloverdell IRA) and the Section 529 plan. With the Education IRA a taxpayer may contribute up $2,000 per year for each dependent to specific type of investment. The earning will grow tax free in this type of plan as long as the earning are eventually used for higher education when distributions are taken from the plan. The distributions can be used for both high school and college tuition. The contributions to these plans are completely phased out once a taxpayer’s AGI exceeds $110,000 for single filers and $220,000 for joint filers.
The other type of education tax shelter is the Section 529 plan. With these types of plans a taxpayer can generally contribute up to $250,000 per year per dependent and if eventually the account is used for higher education then income that is earned in the account will be tax free when it is distributed. This plan can only be used for college only including certain trade and technical schools. There are no income exclusions or AGI phase outs with this plan
.