Common Tax Filing Rules for Student Loan Credits, Deductions

Betsy Mayotte

With the Super Bowl coming up soon and the end of the football season approaching, the Student Loan Ranger wanted to remind you that it will soon be that time again -- tax season. We've talked about the different higher education deductions and credits before , but it's important to know that how you file your taxes, or how someone else files them, will make all the difference as to whether you can take advantage of some of these benefits.

By now, you're probably familiar with the two most commonly used credits and deductions: the American Opportunity and Lifetime Learning tax credits, and the tuition and fees and student loan interest deductions. If you need a refresher, the previous blog post, along with Publication 970 at the Internal Revenue Service website will bring you up to speed.

Here's what taxpayers should know about how to file to get the most out of these credits and deductions.

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-- Credits: The American Opportunity Credit can be a good way to reduce the amount of total tax you owe as it allows you to credit up to $2,500 in qualified education expenses that you paid over the tax year, per student. If you have more than one student in your household, those credits can add up pretty quickly while your tax bill goes down. You can only claim it, however, if the student for whom you paid these expenses was you, your spouse or someone that you claim as a dependent.

If you're the student and you paid the expenses but someone else claims you as a dependent, you won't be able to claim the credit. The person that claims you, however, can. You also can't claim the credit if you're married and you and your spouse decide to file your taxes separately.

Up to 40 percent of this credit is refundable, so if you end up having money left over after paying your taxes, you could get some of this credit back in cash.

The Lifetime Learning Credit can also reduce the total amount of income tax you may owe by up to $2,000, although this one is nonrefundable. This means that it can bring your income tax bill to zero, but you won't ever get a refund of any excess you claimed beyond your income tax owed.

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On the other hand, while you are only allowed to claim the American Opportunity Credit for a total of four years per student, there is no limit to the number of years you can claim the Lifetime Learning Credit. If you are paying qualified education expenses for more than one student, you can claim a different credit for each student if you choose to.

As far as your filing status goes, the requirements are the same as they are for the American Opportunity Credit. The student has to be either you, your spouse or someone you claim as a dependent, and you cannot file as married filing separately.

-- Deductions: A deduction is different from a credit in that instead of reducing the tax you owe, it reduces the income from which your tax liability is calculated. So if your income is $60,000, but you have deductions equaling $5,000, the IRS will only calculate the tax you owe off $55,000.

There are two higher education-related tax deductions you might qualify for. The most common is the student loan interest deduction that allows some consumers to deduct up to $2,500 in qualified interest payments made during the tax year from their taxed income. You may be able to claim this deduction if you or someone else made interest payments on your qualified student loan during the tax year.

If someone else claims you as an exemption on their return, neither of you may claim the deduction. You also are excluded from claiming the deduction if you are married but filing separately from your spouse.

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The other deduction you might be eligible for is up to $4,000 in qualified tuition and fees you paid during the year for yourself, your spouse or a dependent. You can even claim those qualified expenses that were paid with the funds from a loan.

Similar to the other credits and deductions, you cannot use this deduction if you are married filing separately or if someone else can claim you as a dependent. You also cannot claim both this deduction along with either the American Opportunity or Lifetime Learning credits.

As you can see, all of these deductions and credits have similar, but not quite the same filing rules in order to qualify. They also almost all have an income ceiling where you would no longer qualify.

It's important to know all the rules and consult with a qualified tax professional, which the Student Loan Ranger is not. And, if you've defaulted on a prior student loan, know that your tax refund could be in jeopardy So with all that said, enjoy the Super Bowl!

Betsy Mayotte, director of regulatory 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, is a frequent contributor to ASA's SALT Blog; 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.