Ah, the student loan. No fun to pay, but can it be fun to file? Tax time is when this expense can pay off, so our answer is yes! Whether you’re enrolled as a student or graduated long ago, here’s how higher education costs and student loans impact your tax return.

Authorized Savings Plans

We can’t all rely on receiving grants and scholarships. Some lucky students have access to an IRS-authorized savings plan, often funded by parents or relatives. These plans allow the contributor to grow money tax-free in a college fund. 

  • 529 Plan: Qualified tuition programs, also known as the 529 Plan, lets the contributor prepay or add funds to an account to be used toward eligible higher education expenses. They are not tax deductible, but grow tax-free and have no income limit.
  • Coverdell Education Savings Account (ESA): Contributions to a Coverdell ESA are not deductible, but the amounts deposited into the account grow tax-free until it’s time to distribute. Yearly contributions cannot exceed $2,000. The Coverdell ESA can be used for higher education expenses, as well as elementary and secondary education.

Benefit Exclusions

If you receive educational assistance benefits from your employer, it’s possible to exclude the benefit from your income so you don’t have to pay taxes on that amount.

  • Educational Assistance Less than $5,250: If you received up to $5,250 from an educational assistance program, that income can be excluded on your taxes and won’t be included on your W-2. There are certain requirements the plan must meet, so ask your employer if you’re part of a qualified program.
  • Educational Assistance Over $5,250: If your employer pays more than $5,250 toward your educational expenses, that income will be taxed and will appear on your W-2. The exception to this tax is a working condition fringe benefit, meaning that if you had paid out-of-pocket, you could have deducted it as an employee business expense.

Credits & Deductions

Here’s where it gets really good! Education credits can reduce the amount of tax owed on your return and the education deduction can reduce the amount of your income subject to tax.

  • Lifetime Learning Credit: To qualify, you, your spouse, or your dependent must be enrolled as an undergraduate, graduate, or professional degree student. Your modified adjusted gross income (MAGI) cannot exceed $65,000 ($130,000 if married filing jointly). With this credit, you can receive up to $2,000 credit annually.
  • American Opportunity Credit: To qualify, the student has to be pursuing a degree at least half time and MAGI can’t be over $90,000 ($180,000 if married filing jointly). This credit covers the first four years of higher education with an annual credit of up to $2,500, of which up to $1,000 can be refundable.
  • Student Loan Interest Deduction: If your MAGI is less than $80,000 ($160,000 if married filing jointly), be sure to deduct interest paid on your student loan and reduce your income subject to tax by up to $2,500.

Do you have some advice on paying back student loans? Share your tips in the comments below! For one-on-one support to discuss your tax situation, contact your nearest Liberty Tax® office. Follow us on Facebook and Twitter for tax tips throughout tax season.