Tax Benefits of Student Loans

The tax benefits of student loans are definitely the perk of borrowing and give you a chance to recoup some of the cost paid on interest during the year. It is essential to make sure you know how to claim these items on your taxes and know exactly how much you earn and payout to Uncle Sam. Tax credits for student loans are made easy when filing your taxes as you don’t have to itemize the deduction, just make an adjustment to the income you report. However, there are some stipulations. It is important to understand the difference between a tax credit and a tax deduction when filing your taxes. Under certain programs, such as the Hope Credit, a tax credit is more valuable than a tax deduction. A tax credit is applied directly to your bill while a deduction reduces your income that is subject to taxes.

For example, if you owe $10,000 in income taxes to the federal government a tax credit would reduce that amount by $2,500 making your new amount owed $7,500.

The tax incentives come in four different forms:

  • American Opportunity Education Tax Credit
  • The Hope Tax Credit
  • Lifetime Learning tax Credit
  • Tuition and Fees Deduction
  • Student Loan Interest Deduction

Below we have broken down each student aid tax incentive with the requirements and instructions to make sure you are getting every penny back that you earned.

American Opportunity Education Tax Credit

The American Recovery and Reinvestment Act (ARRA) modified the Hope credit beginning in 2009. The resulting benefit became the American Opportunity Education Tax Credit. The AOETC provides a family with a maximum credit of $2,500 for higher education expenses. It was extended in 2011 and 2012 and expanded to benefit a broader range of taxpayers. The tax credit was further extended in 2013 to last through 2017. The $2,500 tax credit for tuition costs can be claimed for four years of post high school education for a total credit of $10,000. Special rules applied to students attending college in a Midwestern disaster area for tax-year 2009, only, when taxpayers could choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit. The credit is available for individuals with a modified gross income of $80,000 or less, or $160,000 or less for married couples filing jointly. $2,500 tax credit for tuition costs for four years of post high school education.

eligibility requirements

  • You can’t claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student.
  • You can’t claim either of these credits if you’re married and you and your spouse file separate returns.
  • Carry at least half the normal full-time workload for the student’s course of study in at least 1 academic period during the year
  • Be enrolled in a course of study that leads to a degree, certificate, or other recognized educational credential
  • Not have expenses used to figure an American Opportunity Credit in any 4 earlier tax years. This includes a tax year when you claimed the Hope Credit for the same student.
  • Must be enrolled at least part-time in the program at a qualified educational institute
  • Not have completed the first 4 years of higher education as determined by the institution
  • Not have been convicted of a felony offense for possessing or distributing a controlled substance
  • Not have an adjusted gross income (AGI) that’s more than the phase-out limits $80,000 if filing as single or $160,000 if married filing jointly. The credit is completely phased out for AGIs of $90,000 if single and $180,000 if married filing jointly.

Income Limits

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

The Hope Tax Credit

Applying mainly to tax years from 1998-2008, the Hope Tax Credit, the acronym for Helping Outstanding Students and Pupils Educationally, directly reduces your taxable income and is similar to the Lifetime Learning Credit up. However the same student cannot claim both during the same year. It provides up to $1800 in tax credits or up to $3600 if you’re a Midwestern disaster victim. IRS Tax Form 8863 can be used for the Hope Credit.

Eligibility Requirements:

  • “Married filing separately” can not be your tax filing stats
  • You can not be a dependent on another person’s income form
  • You are the person paying for the tuition
  • The student must be you, your spouse or dependent
  • You cannot claim the Lifetime Learning credit for the same student during the same year
  • Must be a U.S. citizen or qualified non-resident.
  • Student must not have completed more than two years or post-secondary education.
  • Must be enrolled at least part-time in the program at a qualified educational institute
  • Must not have been convicted of a felony, state or federal, involving a controlled substance
  • Didn’t use the Hope Credit any two earlier tax years

Income Limits

If your modified adjusted gross income is more than $80,000 for a single filer and $160,000 if you’re filing a joint return on your federal taxes than the amount is reduced. The amount is reduced completely if your modified adjusted gross income is more than $90,000 or $180,000 jointly.

Lifetime Learning Credit

The Lifetime Learning Credit offers up to $2,000 in credit per student or up to 4,000 if you’re a victim of a Midwestern disaster to help offset education costs. The credit is similar to the Hope Credit, but allows a student to claim this credit every year eligible with no limit on the number of years filed. The Lifetime credit is based on a family rather than a student, but you can choose which credit, the Hope or the Lifetime, to apply to each student. The maximum amount you can credit each year you qualify is $2,000 as the credit applied to 20% of your first $10,000 paid on out-of pocket educational expenses. The expense follows a typical academic year: the fall through the first three months of the following year.

Eligibility Requirements

  • Must meet income requirements
  • Must be a U.S. citizen
  • Must not be listed as a dependent on another tax form
  • Must not file as “married, filing separately”
  • Cannot claim the Hope Tax Credit the same year

Qualifying Expenses

  • Tuition
  • Books
  • Student Activity fees
  • Course-related supplies and equipment
  • Anything where payment is made as a condition of enrollment or attendance at school
  • Expenses not school-related but directly improve job skills or degree may qualify

Income Limits

In 2012, the income limits increased to $52,000 for single filers and $102,000 jointly to claim claim a full credit if your modified adjusted gross income. In 2011 the incomes were capped at $50,000 and $100,000 for full claims.

Use this form to claim the Lifetime Learning Credit.

Student Loan Interest Deduction

Lucky for students today the interest rates on tuition are staying relatively low compared to the rising tuition costs. If you have paid student loans you have most likely paid interest on them as well. This deduction allows up to $2,500 in interest paid early. This deduction is found in the Adjustments to Income section of the federal tax Form 1040 or 1040A. You do not need to itemize deductions, but if you prefer to do so it will not hurt you. The deduction can be issued for yourself, spouse or dependent. Your lender will send you a 1098-E Form that you will use to see how much interest your paid on education related items for the year as interest rates will vary based upon the loan (Stafford, PLUS, Perkins) and lender: private or federal.

Eligibility Requirements:

  • Must be a U.S. Citizen
  • Must not be a dependent on another person’s tax filing
  • Must not have a  filing status as “married filing separately”
  • Must be enrolled at least half time in a degree or certificate program
  • The loan must have been used for educational purposes such as books, room and board, tuition and fees and transportation.

Income Limits

Your income level reduces the amount of deduction you are able to claim. Incomes $60,000 or less for those filing separately and $120,000 jointly can deduct up to $2,500 in interest. If you make more than $75,000 or $150,000 (MFJ) than you are not eligible to deduct anything. There is a sweet spot from $60,000 to $75,000 where the amount available is prorated.

Tuition and Fees Deduction

You may be eligible for a tax deduction even if you don’t take out a loan to pay for school. Up to $4,000 paid toward tuition and fees can be deducted from your taxable income. On your taxes you can claim the expense as a tuition and fees deduction, Hope or Lifetime Learning Credit, or business expense. You do not have to itemize this deduction unless you use it as a business expense.

Eligibility Requirements

  • Must not file your taxes as “married filing separately”
  • Must be a U.S. Citizen
  • Must not be claimed as a dependent on another tax file for that year
  • Cannot claim the Tuition and fees deduction the same year as a Hope or Lifetime Credit for the same student
  • Cannot claim deductions on items paid for with grants or scholarships that are tax-free

 Income Requirements

The income cap is at $75,000 or $150,000 is filing jointly. At this point you are no longer able to receive any deductions. However if you make $65,000 or less you are eligible for the maximum amount of $4,000. People who make between the two amount are eligible to receive $2,000.

Use Form 8917 to report the fees and tuition tax deduction or use the Federal tax form 1040 to file the amount of the deduction.

Sources: Internal Revenue Service: and

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