Thinking of going back to school, but not sure if you can afford it?
If you want to finish your degree or expand your professional skill set, tuition may be within your reach, thanks to the Federal Government. There are educational tax deductions and credits available that can significantly reduce the burden of paying for a degree. For 2009-2010, some of these credits have been expanded dramatically, and depending on your circumstances, could save you thousands of dollars when you file your 2009 and 2010 returns.
First, there is the standard $4,000.00 deduction for tuition and fees. This deduction reduces your taxable income, which in turn could reduce your tax burden by up to $1,400.00 in total. You can’t claim the deduction against expenses like books or room and board, and you can’t claim this deduction in addition to any other credits.
The Lifetime Learning Tax Credit provides up to $2,000.00 per return per year towards tuition and fees, depending on your income. Anyone taking courses can claim the Lifetime Learning credit, even if he or she is not pursuing a degree. And while other educational credits are time limited, students can claim the Lifetime Learning credit for as many years as they take courses. The Lifetime Learning credit is a great financial incentive for professionals who only need a few classes now and then to top up their skill set, but who aren’t working towards a degree (although students in degree programs could elect to take this credit as well).
If you are planning to earn a Bachelor’s or Master’s, 2009 may be the best time to enroll. President Obama’s stimulus package included an expansion of the old Hope Educational Credit, turning it into the American Opportunity Tax Credit. This tax credit will be available for 2009 and 2010. The total amount refunded has been raised, from $1,800.00 per student per year to $2,500.00. The upper income limits have also been raised, so that individuals earning up to $80,000.00, or couples earning up to $160,000.00, are now eligible for this tax break. For lower-income learners, the credit now also offers refunds of up to 40% of the maximum value. If, for example, your income is too low to require you to pay income tax, you can file a return, claim the credit, and receive $1,000.00.
The AOTC still retains some characteristics of the old Hope Credit. You can only claim it for the first two years of your degree program, for example (although juniors and seniors who have already used up their Hope Credits can claim the AOTC in 2009 and 2010). You can’t claim it against any tax-free income source you used to pay for your education, such as a tax-free scholarship, Pell grant, Veterans’ educational assistance, or employer-reimbursed funds. And you can’t claim a Lifetime Learning credit AND the AOTC on the same return. However, enrollment at any educational institution, whether public or private, live-in or online, makes you eligible to claim the tax credit, as long as you are enrolled at least part-time.
So, which option should you choose? It’s a no-brainer: jump on the American Opportunity Tax Credit for 2009 and 2010 while it’s available. In a down economy, when so many jobs are being lost, gaining a degree or additional certifications could help you change to a skilled, high-paying career or even earn a promotion in your current one. And with so many flexible options available for earning your degree—part-time education, technical education, or online education—there’s no excuse not to seize the day.