Tools Help Families, Student Loan Borrowers Claim Education Tax Credits

Tax time is upon us. For those earning a degree, paying for college or repaying student loans, you may be eligible to claim several higher education-related tax credits and deductions.

Your eligibility for these credits depends on several factors, including your income and whether you've claimed the benefit in the past. Consumers often get confused as to which credit or deduction they should claim -- this week's post aims to give you tools to help clarify eligibility factors.

[Learn about common tax filing rules for student loan credits and deductions.]

The IRS offers important resources to help consumers understand their credit and deduction eligibility. IRS Publication 970 details all the higher education tax credits and explains the eligibility criteria.

Even more helpful is the fairly new education credit tool that will walk you through your circumstances and helps identify which benefits you can claim. Note that the tool only covers the American Opportunity Credit, the Lifetime Learning Credit and the tuition and fees deduction. It does not determine eligibility for whether you can deduct student loan interest paid during the tax year.

You'll need the following information before you get started: your filing status -- single, married or married filing separately or widowed, head of household; the student's enrollment status, including whether the student was enrolled at least half time in a degree or certificate program; your adjusted gross income; and the name of who paid the expenses, when the individual paid them and for what academic period.

[Read six common questions about student loan defaults and tax refunds.]

You'll also need to know if any expenses were paid with tax-exempt funds or with distributions from a Coverdell Education Savings Account or Qualified Tuition Program; how long the student has been in school; whether the taxpayer has claimed any of these credits in the past and, if so, the number of years he or she has done so; and whether the student in question has had a drug conviction.

Examples of tax-exempt funds include Pell grants, money provided by your employer for school, some scholarships and veteran's benefits. Remember, if you qualify for these credits, you generally have to deduct the amount of qualified tuition that was paid with these tax-exempt funds.

Note that unless Congress extends it, 2016 is the last tax year you will be able to claim the tuition and fees deduction. This allows you to deduct up to $4,000 in qualifying tuition and fees that you have paid, even if you paid those expenses with a student loan.

You may be able to claim this deduction if you paid these expenses for yourself, a spouse or a dependent. Because it is considered an above-the-line deduction, you do not need to itemize your taxes to claim it.

[Learn how to pay less in tax from a student loan deduction.]

The student loan interest deduction is one the Student Loan Ranger receives many questions about, so let's review the criteria. While most interest you pay on a loan is not deductible -- with the exception of home mortgage interest -- student loan interest paid during the tax year can be deducted.

To qualify, the loan must have been taken exclusively to pay for qualified education expenses, cannot be a loan from a relative or friend or an education benefit from your employer, and the student benefiting from the loan must have been you, your spouse or your dependent. You can claim up to $2,500 in interest paid by you or someone else on a loan that you are legally responsible for.

Interest is defined as accrued interest, capitalized interest and most origination fees. If you paid at least $600 in such interest, the loan holder will send you the necessary tax form that notes how much you have paid. If you paid less than $600, you will have to call your loan holder or log on to your loan account to obtain the amount.

The deduction phases out if your income is between $65,000 and $80,000 -- $130,000 and $160,000 if you are married. If your income is over that amount, you cannot claim the deduction.

Finally, if you have a defaulted federal student loan and have not made payment arrangements, it's likely that the loan holder will garnish any refund the IRS owes you.

To prevent this in the future, we strongly suggest you start a loan rehabilitation or consolidation program to resolve the default before the 2017 tax year. Once your loan is certified for offset, it almost always stays in that status until the loan is either paid in full or the default is resolved.

Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, responds to public inquiries via the advice resource "Just Ask" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.