Tax Deductions for Students / Education

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

• A tax credit reduces the amount of income tax you may have to pay.
• A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
• Certain savings plans allow the accumulated earnings to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
• An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 

Tuition and Fees Deduction
The Bipartisan Budget Act, enacted on February 9, 2018, renewed the tuition and fees deduction for tax year 2017. If you already filed your 2017 federal tax return and find you can claim the deduction, you can do so by filing an amended return on Form 1040X. Amended returns cannot be filed electronically and can take up to 16 weeks to process.The Tuition and Fees Deduction was extended for tax years 2015 and 2016 earlier.

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The Tuition and Fees Deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you don’t qualify for the American opportunity or lifetime learning credits.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax. You cannot claim the tuition and fees deduction as well as an education credit for the same expense.

Student Loan Interest Deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Qualified Student Loan
This is a loan you took out solely to pay qualified education expenses (defined later) that were:

• For you, your spouse, or a person who was your dependent when you took out the loan.
• Paid or incurred within a reasonable period of time before or after you took out the loan.
• For education provided during an academic period for an eligible student.

Loans from the following sources are not qualified student loans:

• A related person.
• A qualified employer plan.

Qualified Education Expenses
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

• Tuition and fees.
• Room and board.
• Books, supplies and equipment.
• Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

• The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
• The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax.
Your work-related education expenses may also qualify you for other tax benefits, such as the the American opportunity credit, tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above. You cannot claim this deduction as well as the tuition and fees deduction for the same expense, nor can you claim this deduction as well as an education credit for the same expense.

To claim a business deduction for work-related education, you must:

• Be working.
• Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
• File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
• Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

Qualifying Work-Related Education
You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

• The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
• The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

• Is needed to meet the minimum educational requirements of your present trade or business or
• Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law
Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

• It is required for you to keep your present salary, status or job.
• The requirement serves a business purpose of your employer.
• The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

​Education to Maintain or Improve Skills
If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.