In this post, we'll cover the following commonly misunderstood rules for tax deductible education expenses:
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.
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.
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.
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:
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.
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.
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.
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.
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.
We use computer algorithms to monitor your purchases for tax write offs most people miss... like phone bills, insurance charges, home office expenses, gas fill ups, and so on. It's $10 per month.
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.