If you pay tuition, fees, and other costs for attendance at an eligible educational institution for yourself, your spouse, or your dependent, you may be able to take advantage of one or more of the education tax benefits.
You can claim more than one education benefit in a tax year as long as you do not use the same expenses for more than one benefit.
Exception: Qualified expenses used to claim education benefits can also be used to eliminate the 10% penalty on premature IRA distributions.
You may claim only one of the following education tax benefits for the same student per year: tuition and fees deduction, American Opportunity Credit, or Lifetime Learning Credit.
Deductions reduce the amount of income subject to income tax. Deductions for education expenses include:
- Tuition and fees deduction up to $4,000 from gross income. Income limitations apply
- The provision for deducting tuition and fees expires for tax years after 2016.
- Student loan interest deduction up to $2,500 from gross income. Income limitations apply.
- Business deduction on Schedule C or F. You can deduct the cost of education related to the business or farm activity.
- Miscellaneous itemized deduction on Schedule A, subject to the 2% AGI limitation. You can deduct the unreimbursed cost of education required to keep your current job or maintain and improve skills needed for your job. You cannot deduct the cost of education that qualifies you for a new trade or business.
Education Tax Credits
Tax credits reduce the amount of income tax you may have to pay. Income limitations apply. The Education credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
- American Opportunity Credit, $2,500 maximum per student per year.
- Lifetime Learning Credit, $2,000 maximum per tax return per year.
- The Hope Credit applied to 2008 and earlier years. It was replaced by the more generous American Opportunity Credit for tax years after 2008.
Penalty-Free IRA Distributions
If you withdraw money from your IRA before you are age 59½, you are subject to a penalty of 10% of the distribution, in addition to any tax that may be due to the distribution.
- The 10% penalty does not apply to traditional IRA or Roth IRA withdrawals, if you use the money to pay qualified education expenses for yourself, spouse, or for any child or grandchild of yourself or your spouse.
- Qualified education expenses include tuition, fees, books, supplies, equipment, and special needs services required for enrollment or attendance at an eligible educational institution. Room and board for students enrolled at least half-time in a degree or certificate program may also qualify.
- Reduce qualified expenses by scholarships and other tax-free assistance the student receives, but not by gifts or inheritances.
If you want to learn more about how we can serve your tax planning and preparation needs for your business and or personal returns, or if you would like general information about our business advisory and coaching services, we encourage you to contact us at 513-206-9673.