When covering college costs, there are also taxes to think about. Luckily, there are many ways to reduce your tax bill, some of which related to college expenses. Find out how to enjoy tax deductions on college expenses and also learn the best 2 ways to deduct taxes on educational expenses.
First of all, you need to know what a tax deduction is and how it can lower your total tax payment. Essentially, a tax deduction will lower the number of your expenses that’ll be taxed. This means that your tax bill will be cheaper because it’ll be applied to a smaller portion of your expenses.
You can claim a tax deduction for college fees and tuition. These can be for yourself, your spouse, or one or more dependents of yours. Keep in mind that you don’t need to itemize in order to ask for this deduction.
The full deduction amount is $4,000, which you can get if your Adjusted Gross Income (AGI) is less than $65,000 as a single filer or less than $130,000 as joint filers. You can deduct up to $2,000 if your AGI is between $65,000 and $80,000 or $130,000 and $160,000, for single and joint filers respectively. If your AGI exceeds these maximum amounts, your deductions are completely wiped out.
There’s a certain type of fees and expenses that qualify for these deductions and others that don’t. If you paid for something needed to enroll or attend a class, such as supplies and books, you’ll be able to deduct these expenses. This also applies to noncredit courses, as long as they’re part of your degree program.
However, if these aren’t part of your degree program you won’t be allowed to deduct their expenses. Even some expenses required to enroll or attend a class aren’t deductible, for example, insurance, transportation, board, personal or living expenses, and others.
There are many rules that will prevent you from duplicating tax benefits. This means that you won’t be able to deduct the expenses where you’ve already written off their taxes with these deductions. For instance, tax-free expenses won’t qualify for such deductions.
Best 2 ways to deduct taxes on educational expenses
When it comes to college and education, there are a lot of expenses that need to be covered. Education is an investment in your future, but this doesn’t mean you can’t deduct some taxes on what you’ve spent.
1. With an IRA account
If you have an IRA account, you’ll know some of its terms, such as the 10% penalty tax if you take your money out of it before you turn 59 and a half. You’ll also have to pay income taxes on the amount you withdrew. However, did you know it’s possible to avoid the first taxation in some cases? Education is one of them, so you may want to take advantage of this benefit.
As long as the money you’ve distributed goes to qualifying higher educational expenses, you can forget about paying the additional 10% tax. Even if you can’t avoid income taxes, you’ll still save a lot of money with this so-called early distribution.
You can qualify for an early distribution with these tax benefits if you use the money of your account to cover allowable educational expenses for yourself, your spouse, your child, or even your grandchild. The expenses you can pay with this money include all of those that are needed to enroll or attend an eligible educational institution, such as tuition, fees, supplies, and more.
2. As work-related education
If you’re self-employed, it’s possible to deduct what you’ve spent on education as a business expense, as long as you can prove that your education is work-related. This means that you need to show that you had to pursue this education to keep your current job or salary, to keep the skills you need for it, or to improve these.
As a result, you’ll be able to lower the amount of your taxable income. In other words, you’ll reduce what you’ll pay as federal income tax and self-employment tax because you’ll be taxed on a lower portion of your money, as you’ve deducted work-related education costs from your total income. You can deduct what you’ve spent on tuition, supplies, come travel costs, and more. Here are other great ways to reduce your tax bill!
Keep in mind that you can’t file any deductions if your education was part of a program to qualify for another business or if it was required to meet the minimum educational level of your current trade. It’s also not possible to get these tax reductions if you paid for these expenses with another tax-free source, like a grant, scholarship, or employer-provided educational assistance.