U.S. Federal Taxes: Overview
If you are planning to work in the US, either now or in the future, then navigating the tax code is going to be a large part of your financial wellbeing. Gathered here are aspects of the tax code that deal with education and college related expenses. While the information here is a good start, it is only a broad overview and not a complete guide to filing taxes. For specific questions or additional information, you may wish to visit the IRS website or consult a tax professional. International students should consult the “Taxes & Social Security” page of the Harvard International Office website.
Do I Need to File Taxes?
Determining whether or not you need to file taxes depends simply on two things: how much money you earned in the prior tax year and how much tax was taken out (aka “withheld”) for taxes.
If your earned income is over a certain limit as determined by the IRS, you may be required to file taxes regardless of how much was withheld from your paycheck.
- As an example, a typical Harvard undergraduate was required to file (2018) taxes if their income (including taxable scholarships) was equal to or greater than $12,000.
- The IRS strongly suggests that you file taxes, even if you are not required to do so. By filing your taxes, you may be eligible for a refund of some or all of the income withheld.
Types of Tax Benefits for Education
The information provided here is intended only to get you started to learn about potential tax benefits related to higher education. It is important to note that there are eligibility restrictions and we strongly suggest visiting the IRS website directly for the most comprehensive information about tax benefits for higher education.
American Opportunity Credit
- This is a credit of up to $2,500 per eligible student based on Qualified Education Expenses paid during the tax year. The American Opportunity Credit can only be used for up to four years per eligible student.
Lifetime Learning Credit
- This is a credit of up to $2,000 per eligible student based on Qualified Education Expenses paid during the tax year. The Lifetime Learning Credit does not have a limit on the number of years it can be used per eligible student.
Tuition and Fees Deduction
- This is a deduction of up to $4,000 from your Adjusted Gross Income (AGI) based on amounts paid for Qualified Education Expenses. This deduction can be claimed for multiple students and the maximum deduction in a tax year is $4,000.
Student Loan Interest Deduction
- If you are a student making payments on an education loan that is accruing interest, you may be able to deduct some or all of the interest you paid that year from your taxes.
- Your parents may be able to deduct some or all of the interest they paid on their loans, taken on your behalf, if they still claim you as a dependent. The current limit is $2,500 per year, subject to income restrictions.
Important Questions to Consider
What are Qualified Education Expenses?
When filing taxes, you should know what counts as “qualified” and what doesn’t. This can be confusing because the definition of “qualified” is contextual. For example, the IRS may have a different definition of “qualified” than a 529 plan or other education savings plan provider.
What does the IRS count as Qualified Education Expenses?
- Per IRS guidelines, the expenses that you paid directly (or with a loan) for tuition, fees, and other related expenses count as qualified education expenses.
- The IRS website states that the following expenses do not qualify: room, board, insurance, medical expenses (including student health fees), transportation, and personal/living/family expenses.
What are Credits and Deductions?
Credits and deductions are two different ways to reduce your tax liability.
A deduction reduces the amount of income you have that is subject to tax. The actual benefit is tied to your tax bracket. In other words, if you are in the 25% tax bracket and have a Deduction of $1,000, your benefit is a $250 reduction in your taxes (25% of $1,000.)
A credit on the other hand reduces the amount of income tax you have to pay in a 1:1 ratio. In other words, if you have a $1,000 Credit, then your benefit is a $1,000 reduction in your taxes.
As a general rule, you should seek out credits before deductions, since the benefit is usually larger (i.e. to your advantage).
Additional Resources and Information
The information provided here is taken from the IRS website and is intended solely as a guideline. Because tax laws are constantly changing, information found here may change. For the most up to date and comprehensive information, we strongly suggest visiting the IRS website, or consult a tax professional should you have specific questions.