Federal Tax Breaks for Graduate School & Other Tax Benefits

Sage Crary
Sage Crary
Director of Financial Aid and Scholarships; pursuing an M.S. in Ethics and Religion

If you paid for educational expenses in 2019, you may be able to save money on your taxes through a variety of different programs. While it’s true that there are slightly more tax break options for your undergraduate degree, there are still a host of programs with tax incentives to help defray the overall cost of obtaining your graduate degree. Check out some of the more common programs below. While we in financial aid hold lots of tax knowledge, we are not certified public accountants, and tax laws can and do change frequently, so check with your personal tax advisor for the best options for you and your family.

American Opportunity Tax Credit

This tax credit is specifically only for undergraduate costs, but if you are coming directly from undergraduate study (or have children of your own who are undergraduates currently) this is typically the ‘best bang for your buck’ program.

Tax credits literally work just as a credit on the amount of taxes you owe, so it’s a dollar for dollar match up to $2,500 per year. Therefore, if your tax liability was assessed at $4,000 for the year, but you had up to $2,500 in qualified undergraduate tuition, fees, books, and equipment, you would only owe $1,500 in taxes and would get a refund of the full $2,500. The American Opportunity Tax Credit can be claimed for up to four years and is eligible for tax filers whose total adjusted gross income is under $80,000 a year ($160,000 for joint filers). You can also receive up to 40% of your American Opportunity Credit as a refund, even if you earned no income or had no tax liability!

Lifetime Learning Credit

The Lifetime Learning Credit is for graduate or undergraduate costs, and there is no limit to the number of years you can claim it. This is an ideal credit for graduate students and is one of the most common types of tax incentives that graduate students take advantage of.

How it works is that you can claim up to 20% of the first $10,000 you paid in tuition and fees in 2019 for a maximum of $2,000. The Lifetime Learning Credit does not count living expenses or transportation as eligible expenses, but you can claim required books in addition to tuition and fees. You can claim the credit on your income taxes if your adjusted gross income was less than $58,000 (or $116,000 if you filed jointly) in 2019. However, the Lifetime Learning Credit is not refundable, so if you did not owe taxes or did not work during 2019, you cannot receive this back as a refund.

Tuition and Fees Deduction

Deductions work differently than credits. Credits are a direct dollar-for-dollar offset of your taxes owed, while a deduction reduces your income. This reduction to income reduces your taxable burden by approximately 15-25% of your deduction amount. So in the case of the tuition and fees deduction, you can deduct (aka reduce) up to $4,000 from your gross income for money you spent on educational expenses, which will in turn reduce your taxes by an average of $600-$1,000. You can deduct up to $4,000 in tuition, fees, books, and supplies that you paid in 2019, and you can qualify if your adjusted gross income is less than $65,000 (or $130,000 if married filing jointly). However, you cannot claim both the tuition and fees deduction and an education tax credit in the same year (it’s one or the other), so consult your tax professional for which one is best for your individual circumstances.

Scholarships and Grants

There is only one scenario in which going to school and receiving financial aid could cost you more in taxes, and that is if your scholarship and grants that you received in a given year are more than the cost of attending school. For example, if you received $10,000 in scholarships and grants (aka free money) but your total bill for tuition, fees, and books was only $6,000, the $4,000 that you received as a refund could be considered taxable income. There are many different nuances to this, so if you are in this situation it’s best for you to reach out to a tax professional directly for one-on-one advice. However, in general, it’s always best to take all the scholarships and grants each year, and if you owe a small amount in taxes, it’s still a much better deal!

College Savings Plans

All the scenarios thus far have been for students who are currently in school and had educational costs in the most recent tax year. However, there are also tax savings to be had if you choose to plan ahead. Many people opt to start a college 529 plan or other type of educational savings plan. For these accounts, the interest earned grows tax-free, as the money deposited into the account has already been taxed. Then when the money is used for qualified educational expenses, there are no tax penalties. It’s basically like a ROTH IRA, but for education costs! These accounts are special investment accounts and need to be set up by your investment specialist, but it’s another great way to curb the cost of education and ensure you are getting the most out of your money.

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