Thought your first big paycheck would be when you earned your first promotion at your post-graduation job? Instead, your first big check may come in the form of a tax refund. Tax returns in college or just after graduation can produce a large tax refund because of education tax credits and deductions.
American Opportunity Credit
Available for at least the 2009 and 2010 tax years, this credit is the Hope Education Tax Credit 2.0. It beefs up the amount of the credit, ups the income limits, allows for tax refunds beyond what you paid in taxes, and goes from a credit on the first two years of college to one you can claim for four years. The credit is for $2,500 per year.
If your modified adjusted gross income (MAGI) is at or below $80,000 for a single person or $160,000 for a married couple, you will receive the full $2,500 in the form of a tax refund. This is true whether you made $1 or $80,000.
If your MAGI is above $90,000 as a single person or $180,000, you aren't eligible for the American Opportunity Credit. However, if you earned between $80,000 and $90,000 for a single person and between $160,000 and $180,000 the calculation below shows the maximum amount of credit.
You are single and your MAGI was $85,000. You would qualify for a tax credit of $1,250.
$1,250 = ($90,000-$85,000)x$2,500
You are married and your MAGI was $175,000. You would qualify for a tax credit of $625.
$625 = ($180,000-$175,000)x$2,500
You can't claim two of these tuition credits such as the American opportunity tax credit and the lifetime learning credit on the same tax return. In subsequent years, you can claim the credits which were omitted previously. This rule is similar to the one pertaining to parents who are claiming this credit for a dependent son or daughter, but they have a second student in college at the same time. (Education bills may not be as stressful as you think - these student tax breaks can help! Don't miss Student Tax Breaks.)
The Hope Education Tax Credit
This is the original tax credit for education.It is no longer applicable past tax year 2008 with the exception of an expanded Hope Education Tax Credit for Midwest disaster areas worth $3,600 for the 2009 tax year. Midwest disaster areas are parts of the Midwest impacted due to tornado, flood or other natural disaster where it was declared a federal disaster area. If you think your area might qualify, you can find the full qualifying county lists on IRS.gov.
Lifetime Learning Credit
If you were a grad student, this is the credit you must use. It's also a credit that can be claimed over and over again because there is no limit in the number of years it can be claimed. You could, for example, use it when taking a course or two or when pursuing a PhD. The amount of this credit per tax year is $2,000. The Lifetime Learning Credit can be claimed by all citizens and permanent residents taking at least one post secondary class, subject to similar restrictions as the Hope Credit.
This is a non-refundable tax credit. Thus, you can't get a refund for more than you paid in taxes. For example, let's say you qualify for the full $2,000 credit based on your income, but you only paid $640 dollars in taxes for the 2009 tax year. You would receive a credit of $640 dollars.
Tuition and Fees Deduction
This deduction is applicable if your income does not fall in the specified range to qualify for any of the aforementioned credits. It can reduce taxable income in 2009 by up to $4,000. Thus, by 2009 tax year income limits, you can declare this deduction if you make above $90,000 as a single person or $180,000 as a married couple.
Student Loan Tax Deduction
Tax benefits don't end the year after graduation.When you start paying off your student loans, you will get to claim a deduction for the interest you pay on your student loans. You can claim the student loan tax deduction for as many years as you continue to make payments on your student loan debt, as long as you qualify for the current tax year's income limits. In 2008, the amount you could deduct from your taxable income was $2,500. The amount of the deduction you can claim is phased out in the same way as all education credits and deductions, although the student loan deduction can have different limits. Check IRS.gov to find out income limits for the current tax year.
Let's say due to your current income, you were able to deduct the full amount of $2,500 in tax year 2008. If your marginal tax rate was 15%, you would have gotten back $375.
Note: Unlike the tax credits mentioned, only the person who took out the loan can claim the deductible, no matter who pays the bill. (Consolidating your student loans offers convenience, but there are drawbacks. Check out Should You Consolidate Your Student Loans?)
Qualified Education Expenses
All of the educational credits and deductions require that the expenses you are declaring are for qualified education expenses. Qualified education and expenses for most tax credits and deductions means tuition and fees, plus books and other materials required for your courses. In some courses a computer can qualify, only if it is required by your institution or individual classes for attendance.
The Bottom Line
Student loan tax deductions and credits are almost like the government is offering you a retroactive scholarship for your education. Take advantage of all the deductions and credits you qualify to receive. Parents or the student can claim all deductions and credits with the exception of the student loan tax deduction. This tax deduction can only be claimed by the person whose name is on the loan.