Tax Advantages For Going Back To School

tax advantages for adult college studentsConsidering going back to school to advance your career?  That’s smart for a couple of reasons.  First, it’s likely to improve your future financial bottom-line.

And there are a number of tax credits and deductions you can claim for going back to school as an adult – especially if you are going to school to advance your existing career. The tax benefits are more limited, however, if you are going to school to get qualified in a different career field.

First, you may qualify for the Lifetime Learning Credit, which is a dollar-for-dollar tax credit, as opposed to a deduction. The Lifetime Learning Credit is worth up to $2,000 against your taxes. You cannot claim it for yourself in the same year as you claim the American Opportunity Credit for yourself, though you can claim one for your dependent and one for yourself if you pay higher education costs for your dependent as well as for yourself, or for two different dependents.

The American Opportunity Credit is another powerful tax benefit, but hurry: Unless Congress acts to extend it; the credit expires in December 2017. The full credit, worth up to $2,500, is available to individuals, whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing joint returns.

The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

Deductions
You can deduct up to $4,000 in tuition and fees against income if you qualify, by filling out an IRS Form 8917. You can do this even if you can’t qualify for the Lifetime Learning Credit because your income is too high. You can’t take this deduction if someone else can claim you as a dependent, though, or if you’re married and file separately.

You can generally deduct any interest you pay for student loan debt that is incurred to go back to college if furthering your career. Good news: Student loan debt interest, as well as tuition and fees, are “above the line” deductions: You don’t have to itemize to take advantage of them.

You can also deduct education expenses to further your existing career, provided the program doesn’t qualify you for a new career. The methodology depends on whether you are self-employed or an employee of someone else. If you are self-employed, you can deduct the costs of continuing education, or other programs in your field on Schedule C, Profit (or Loss) From Business.

If you are an employee, you can deduct these expenses – to the extent they exceed 2 percent of your adjusted gross income – as unreimbursed employee business expenses. To claim them, file a Form 1040 (you can’t use 1040A or 1040EZ), along with a Schedule A.

Exemptions
Normally, if you pull money out of an IRA prior to turning 59 ½, you have to pay income taxes, if applicable, plus a 10 percent penalty for early withdrawal. But that penalty doesn’t apply to withdrawals for the purposes of paying higher education expenses for yourself or for your dependents.

You will still have to pay income taxes, unless you are withdrawing money from a Roth IRA that has been in the account for five years or longer. But you won’t have to pay the penalty.

Scholarships
Normally, when someone pays money on your behalf, you have to claim the amount paid as income on your taxes. But scholarships are generally not taxable if you are enrolled in a degree program, and you use the money for educational expenses.

This creates a burden for you, though: You must keep a record of how you spend the scholarship proceeds. However, this is no problem when the scholarship is paid to the financial institution and not to you directly.

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