Education Tax Credits and Student Loan Interest Deductions – Teacher Tax Tips
April 15th is fast approaching! Can you believe that the school year is almost over? I know you have a lot of lesson planning to do, but do not overlook the importance of filing your taxes on time. Procrastinators may elect to file an extension, but why bother when programs like TaxAct take the hassle out of preparing your return? Best of all, you can file your Federal 1040 for FREE with TaxAct! Can't you tell I love that program? Not only has TaxAct saved me time and money, it has taught me a lot about taxes, and I want to share that information with you.
What do I do with Form 1098-T?
Did you receive a 1098-T form in the mail from an educational institution to which you paid qualified tuition expenses for yourself or a loved one in the preceeding tax year? DO NOT THROW THIS STUB AWAY! This is your key to receiving either the Hope Credit or the Lifetime Learning Credit.
The Hope Scholarship Credit
You, taxpayer, are eligible to claim the Hope Scholarship Credit if your paid qualified tuition and related expenses for anyone in your family who is enrolled at least half-time in either their first or second year of post-secondary education (college, technical institution, vocational program) leading toward a degree, certificate, or other form of recognized educational credential.
The amount that can be claimed as a credit follows this logic:
- 100% of the first $1,100 of the taxpayer's out-of-pocket expenses for each student's related expenses, PLUS
- 50% of the next $1,100 of the taxpayer's out-of-pocket expenses for each qualified tuition and related expenses
Therefore, you are eligible to claim a $1,650 tax credit per learner. Do you have a couple kids in their freshman and sophomore years of college? Multiply the number of students by $1,650 to arrive at your total tax credit. That's a nice break.
This sounds too good to be true. So what's the catch?
The Hope credit is gradually reduced for taxpayers with a modified adjusted gross income (AGI) between $47,000 ($94,000 for married joint filers) and $57,000 ($114,000 for married joint filers. You'll get a little less of a credit if you're making that kind of money.
If your adjusted gross income (AGI) exceeds $57,000 ($114,000 for married joint filers), you may not claim the Hope Scholarship Credit. My apologies go out to the upper middle class folks.
The Lifetime Learning Credit
Here is another swell tax credit for those paying qualified tuition and related expenses for anyone in the family who is enrolled in an eligible educational institution. I know what you're thinking. This sounds just like the Hope Credit. Well, it kind of is like the Hope Credit, and YOU CANNOT CLAIM THE HOPE CREDIT AND THE LIFETIME LEARNING CREDIT ON THE SAME STUDENT! Pick one or the other, but you can't claim both for the same student. That's double dipping, and if you try it, expect a call to arrange an audit by your friendly neighborhood taxman.
Here's how the Lifetime Learning Credit is calculated:
- 20% of the taxpayer's first $10,000 out-of-pocket to cover tuition and related expenses.
You receive a $2,000 tax credit if you paid over $10,000 in tuition for someone in your family. No additional credits exist at this time, but it may expand in the future.
This reminds me of the Hope Credit and sounds too good to be true. So what's the catch?
The Lifetime Learning Credit is gradually reduced for taxpayers with a modified adjusted gross income (AGI) between $47,000 ($94,000 for married joint filers) and $57,000 ($114,000 for married joint filers. You'll get a little less of a credit if you're making that kind of money.
If your adjusted gross income (AGI) exceeds $57,000 ($114,000 for married joint filers), you may not claim the Lifetime Learning Credit. Again, my apologies go out to the upper middle class folks.
What do I do with Form 1098-E?
Got a 1098-E in your mailbox toward the end of January? Do you know what to do with it? This is your key to deducting the interest you paid in the preceeding tax year on your outstanding student loan debts.
Student Loan Interest Deductions
You do not have to itemize your tax return to claim this credit! Take the standard deduction for yourself and throw this interest deduction on top of that to reduce your gross income. Thank you, IRS and lawmakers for this wonderful bonus. You may deduct up to $2,500 in qualifying interest paid on your student loans. Nice.
I know there are some hitches to this thing. Come on, it can't be that easy.
Correct. Like any credit, there's always a snag for those doing a little better than the rest of us.
- The credit is gradually reduced for those with an adjusted gross income (AGI) between $55,000 and $70,000 ($110,000 and $140,000 for married joint filers).
- You may not claim the credit if your adjusted gross income (AGI) exceeds $70,000 ($140,000 for married joint filers).
I am not a tax professional. I do not know every nuance of the tax code. Consult a certified tax professional for expert advice. Should you file jointly or separately? That's a good question to ask, and it may have bearing on your eligibility for the tax credits listed above.
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