Education deductions and credits

You may also qualify for tax breaks on certain higher education expenses that you pay for yourself or someone else. Higher education generally includes undergraduate and graduate degree programs, as well as vocational or technical certificate programs at an eligible institution. You subtract the deductions as adjustments to income, which reduces your adjusted gross income (AGI), and the credits from the tax you owe.

Education deductions

For example, you may be able to deduct up to $2,500 for student loan interest you pay for yourself or your spouse if your modified adjusted gross income (MAGI) is less than $65,000 if you’re single or $135,000 if you’re married and file a joint return. You’re eligible to take the deduction each year of the loan term, provided you continue to meet the MAGI requirement. If you co-sign a loan for a dependent and make payments on the loan, you can deduct up to $2,500 of that loan’s interest.

You may also qualify to reduce your AGI by deducting up to $4,000 you pay in tuition and fees for yourself, your spouse or a dependent that you claim on your tax return. You can deduct money you borrow to pay those bills, but not money you withdraw from a tax-free education savings account or money you receive in tax-free interest from U.S. savings bonds.

If you work as an elementary or secondary school teacher, teacher’s aide, counselor or principal, you can deduct up to $250 you spend to buy supplies for your classroom — provided you’re not reimbursed for those expenses. If both you and your spouse qualify for this deduction, you can deduct up to $500.

Education credits

You may also qualify for one or both education credits, though you can take only one credit per student. In addition, your MAGI must be less than the annual limit in order for you to be eligible.

• Hope credit is for students enrolled at least half time in the first two years of higher education toward a degree, certificate or diploma at a qualified institution.

• Lifetime Learning credit is for all qualifying higher education expenses for an eligible student at any point in his or her life. The student — you, your spouse or a dependent for whom you claim an exemption — can take any type of course, whether or not the study leads to a degree or certificate.

Remember, credits are potentially bigger tax savers than deductions because they directly reduce the tax you owe. That becomes an issue, for example, if you have to choose between taking a tuition and fees deduction or a Hope or Lifetime Learning credit for the same expenditure because you can’t take both the deduction and the credit for the same expense. You may want to calculate your taxes both ways and use the one that saves you the most money or ask your tax adviser to help you compare the potential savings.  And you’ll want to be sure you keep detailed records of what you spend on school expenses during the year in order to get the most from either credit.

To claim either the Hope or Lifetime Learning credit, you complete IRS Form 8863. To help you complete the form, you should receive a Form 1098-T from the educational institution you, your spouse or your dependent attended. You can find more information in IRS publication 970, Tax Benefits for Education.