Students getting a master's degree get a little help with their education expenses from the IRS. Tuition, fees and other qualifying expenses can help reduce the total tax bill at the end of the year.
Lifetime Learning Credit
The Lifetime Learning Credit can be worth up to $2,000 per tax return, calculated as 20% of the first $10,000 of eligible expenses. Modified Adjusted Gross Income (MAGI) must be less than $60,000 for single filers to claim the credit (less than $120,000 if married filing jointly.) The amount of the credit is also reduced if MAGI is over $50,000 for single filers ($100,000 if married filing jointly.)
Anyone taking courses at an institution that is eligible to participate in a federal student aid (FSA) program may claim the Lifetime Learning Credit, whether the courses lead to a degree or are stand-alone courses taken to acquire or improve job skills. The credit can be claimed for any number of years.
Eligible expenses include tuition and fees that are required to be paid directly to the institution as a condition of enrollment. Books and supplies do not qualify unless the student is required to purchase these directly from the institution. Extraneous expenses such as room and board, transportation, insurance and medical costs do not qualify.
The school will issue Form 1098-T each January to help with calculating the amount of qualified expenses. Parts III and IV of Form 8863, Education Credits, must be completed to claim the Lifetime Learning Credit.
Two other education credits provided by the IRS – the Hope Credit and the American Opportunity Credit – cannot be claimed by graduate students. The Hope Credit applies only to the first two years of postsecondary education and the American Opportunity Credit can be claimed only during the first four years of college.
Tuition and Fees Deduction
The Tuition and Fees Deduction can reduce the amount of income subject to tax by up to $4,000 when MAGI is less than $65,000 ($130,000 if married filing jointly.) When MAGI is over $65,000 but less than $80,000 (between $130,000 and $160,000 if married filing jointly) the deduction maximum is reduced to $2,000.
Similar to the Lifetime Learning Credit, this deduction can be taken by any student taking at least one course at an institution eligible to participate in a FSA. Eligible expenses are those which are required to be paid directly to the school as a condition of enrollment.
The Tuition and Fees Deduction and Lifetime Learning Credit cannot both be used on the same tax return for the same student. Choose the option resulting in the lowest tax bill. Expenses paid using tax-free funds (Pell grant, scholarship, etc.) are not qualified for the deduction or the credit, however expenses paid by a student loan can be used.
Form 1098-T will show qualified expenses eligible for the Tuition and Fees Deduction. Complete Form 8917, Tuition and Fees Deduction, to take the deduction.
Business Deduction for Work Related Education
Another option for those who are pursuing their master's degree to enhance their current career is to take the Business Deduction for Work Related Education. The courses must either be required by the student's employer or by law in order to keep a current job, salary or status, or if not required, must be to maintain or improve skills needed in the student's current job. Total education expenses must also be greater than 2% of the taxpayer's Adjusted Gross Income.
Education expenses are not qualified for this deduction if the courses are required to meet just the minimum education level specified for the job. Also, courses taken to qualify for a new job or trade cannot be claimed. If the student has not worked for more than one year the business deduction does not apply.
Claim the business deduction with other itemized deductions if the student is an employee or on the appropriate schedule for self-employed individuals.
Student Loan Interest Deduction
Those using a student loan to pay for graduate school may be able to deduct the interest they have paid throughout the year if MAGI is less than $75,000 ($150,000 if married filing jointly.) The amount of this deduction is reduced at the high end of the MAGI limit.
The student must be attending school at least half time to take this deduction. The financial institution receiving the interest payments will issue Form 1098-E showing the amount of interest paid.
Financing Graduate School
Additional education tax breaks are available through participation in a Coverdell education savings account or a qualified tuition program. Rules governing these as well as the other education credits and deductions are complex. Consult IRS Publication 970, Tax Benefits for Education, for complete details.
Sources:
H&R Block Tax Tip 20: Education Credits & Deductions Accessed August 15, 2010
H&R Block Tax Tip 46: Lifetime Learning Credit Accessed August 15, 2010
Turbo Tax: Deduction for Higher Education Accessed August 15, 2010
Karen Pickell - Karen Pickell is a Contributing Editor of Flycatcher: A Journal of Native Imagination. Her creative writing is included or forthcoming in ...
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