What you need to know
Whether you're currently hitting the books or still dealing with student loans, figuring out the tax breaks available for educational expenses can seem overwhelming. But don't worry—we're here to break it down into manageable pieces so you can make the most of the government incentives at your disposal.
Navigating Educational Tax Benefits
Student Loan Interest Deduction
Yes, student loans are a drag. But did you know you might be able to deduct up to $2,500 of the interest you paid over the year on your student loans? This deduction is designed to ease the burden, especially in the early years of repayment. The amount you can deduct begins to phase out as your income increases, so this benefit gradually decreases as you hopefully start earning more.
American Opportunity Tax Credit and Lifetime Learning Credit
These two credits can significantly reduce your tax bill or even result in a refund—putting money back into your pocket! Here’s how they generally work:
American Opportunity Tax Credit is mainly for undergraduate students and can cover expenses like tuition, books, and other supplies, up to $2,500 per student each year for the first four years of college.
Lifetime Learning Credit helps with the cost of tuition and related expenses for undergraduate, graduate, and professional degree courses—with no limit on the number of years you can claim it. This can get you up to $2,000 per tax return.
Not sure which one you qualify for? Here’s a handy chart comparing the two.
Tools and Resources
The IRS offers an interactive tool that guides you through which credits you may be eligible for and how to claim them to maximize your savings. It’s user-friendly and a great way to ensure you’re not leaving money on the table.
Education credits and deductions can be complex, and everyone’s situation is unique. If you’re unsure or have specific questions, please don’t hesitate to reach out to your Collective team. We’re here to help you navigate these waters.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.