The complete guide to writing off educational expenses

In this post, we'll cover the following commonly misunderstood rules for tax deductible education expenses:

  • Tax deductions for skills and professional training supporting your current work as a 1099 contractor
  • Student loan interest deduction
  • Tax credits for college courses

Training for a new job or honing your current skills?

If you are spending money on things like classes, books, mentorships, workshops, or study materials for improving then skills you use on the job as a 1099 contractor, those expenses could add up to big deductions when you file your taxes. The IRS considers these costs as part of doing business, so you won’t be taxed on them. Keeper will help you identify these expenses as they happen and we’ll have the totals ready for you to plug in when you’re ready to file your taxes.

Here are some examples of training costs that could count as tax deductions:

  • Martha takes a sales workshop that costs $700 for the week, to improve her game as a real estate agent. Including this deduction means she pays $210 less in tax for the year.
  • Jose buys $60 worth of books to improve his writing ability for his copywriting gigs from Upwork. He saves twenty bucks at tax time from one Amazon purchase.
  • Naomi paid $199 for an online course to learn how to better market her Airbnb cottage in Delaware. Keeper made sure she included it on her taxes, giving her a cool $60 she wouldn’t have otherwise kept.

So what’s the catch? Not all training can count as a tax deduction. If you are spending money to start a new career, those expenses are not tax deductible. For example, the study and exam costs for becoming a real state agent would not qualify, but if you are currently a real estate agent, then you could count the training costs that help you grow your selling skills. We know you’re busy and not always thinking about every purchase you make, that’s why we’re here to help. You can stay focused on A-grade work performance, confident that Keeper has your back.


Student loan interest is tax deductible

You can count student loan interest as a tax deduction if the loan was used to pay for coursework complete by you, your spouse, or one of your dependents.

You must be legally obligated to pay the loan in order to count the interest payments. So, if your generous uncle pays some of your loan, he wouldn’t be able to deduct the expense if his name was not actually on the loan.

A student can only claim this tax deduction if no one else claims her as a dependent. If your daughter takes out a loan in her name only and you are not legally obligated to pay it, but you claim her as one your dependents, neither of you would be able to claim the interest payments as tax deductions. Make sure you take this into account when planning for how you plan to fund education for your kids.

A couple other things to keep in mind about the student loan interest tax deduction:

  • There is a cap of $2,500 on this deduction per tax return.
  • This is an “adjustment to income,” meaning you can claim this tax deduction even if you are not itemizing.
  • The school much be eligible; This includes colleges, universities, and other institutions that are eligible to participate in a U.S. Department of Education student aid program.
  • Your modified adjusted gross income must be less than $80,000 (or $165,000 if you file with your spouse) to claim this tax deduction. If your modified adjusted gross income is over 65k (or 135k for a married filing) then this deduction will be phased out.
  • The loan must have been used to pay for tuition, school fees, books, or housing. Qualified housing costs are limited to an amount determined by the college or university.
  • Origination fees for loans that cover qualified expenses are also deductible.
  • Credit card interest can also be deductible if used only for eligible academic expenses.

The Lifetime Learning Credit and the American Opportunity Credit

Both the Lifetime Learning Credit and the American Opportunity Credit are options for offsetting the costs of college education. While the two credits are similar, there are some important differences and you can only claim one or the other, not both. You’ll want to chose the best credit for your situation, so it pays to do your homework. Here’s how they work:


Who can claim these credits?

Both credits can be claimed by either the student taking the classes or by their parents, if they claim their children as dependents. A big difference between these two credits: the American Opportunity Credit can only be claimed for undergraduate coursework and can only be claimed for a maximum of four years, while the Lifetime Learning Credit can be used for undergraduate, graduate, and non-degree or vocational training and can be used for any number of years—hence the “lifetime” part of the name.


What expenses do the Lifetime Learning Credit and the American Opportunity Credit cover?

Both credits let you claim money spent on tuition, books, equipment, and school fees. Expenses for housing or transportation do not count here. The Lifetime Learning Credit lets you claim 20% of the first ten thousand dollars you spent, so you’re credit is limited to $2,000. The American Opportunity Credit allows you to claim 100% of the first two grand spent and a quarter of the next two thousand, meaning the highest possible credit would be $2,500.


Are these credits refundable?

Taxes are notoriously complex and credits are certainly not simple. Some tax credits will only reduce your tax bill, but if the the credit is larger than what you owe, then you and Uncle Sam just call it even and no one gets a check. These are called “non-refundable” credits because they can not trigger a tax refund. The Lifetime Learning Credit is one of these, so if you earned little or no money for the year, this credit won’t help you out.

A refundable credit is one that will earn you a refund from government if you reduce your tax debt to a negative amount. The American Opportunity Credit is partially refundable. You will be refunded 40% of the credit value if you earned no income for the year, so a maximum of $1,000. Many people assume they don’t need to file taxes if they earned no income, but they might be missing out on free money like this if they don’t.


What else should I know about the Lifetime Learning Credit and the American Opportunity Credit?

Your school should send you a Form 1098-T at tax time that will document eligible costs you paid to the institution. You can only claim one of these two credits each year. There are income restrictions on these tax credits; they are designed for households in middle and lower income ranges and are phased out and eliminated based on your modified adjusted gross income. The IRS provides an online tool for deterring your eligibility to claim a tax credit for education. You will use the IRS Form 8863 to claim either of these two credits. It’s best to claim the American Opportunity Credit while you can—it has a higher limit and is partially refundable. The Lifetime Learning Credit will always be available, even if you have claimed the American Opportunity Credit in the past.


Finals

From deductions to credits, there are plenty of options for saving at tax time when you’ve spent money on education. Keeping track of qualifying expenses throughout the year isn’t easy, but you don’t have to rely on the receipt-hording method. As always, Keeper has your back and will watch your spending and flag purchases for you, so you’re ready to go when it’s time to file.


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Note: at Keeper, we care about helping you save on taxes. That leads us to generalize tax advice which ultimately cannot be completely generalized. Everyone's situation is different. Please drop a note above or reach out via email if you have questions.