Student Tax Credit Forms

Students can get a break on their taxes by using the various programs laid out in IRS Publication 970. While most prospective students looking into higher education know about the Free Application for Federal Student Aid (FAFSA®) and its connection to loans, grants, and scholarships, this is another part of the federal assistance package that is largely unnoticed. Check it out for the many ways you can save money while you’re getting your education.

What’s Covered in IRS Publication 970

This document covers the following programs, among others, that allow students to save money on their tax bills:

  • Scholarships and Fellowship Grants: Whether they are athletic or academic in nature, scholarships are generally defined as funds or credits given toward tuition, fees, and other expenses associated with higher education. Fellowship grants are very similar, but they are specifically for the student’s service with a research study. These funds are tax-free if:
    • you are working toward a degree at an eligible school or institution
    • the amount awarded doesn’t exceed the qualifying expenses
    • the funds are not restricted to a certain purpose, like dorm fees
    • the funds are not paying for services like teaching
  • Pell Grants: For tax purposes, these are scholarships and the same rules apply.
  • Veterans Benefits: Payments made under plans administered by the Veterans Administration (VA) are tax-free.
  • American Opportunity Credit: This is a tax credit of up to $2,500 for each eligible student with qualifying expenses. The credit comes directly off your tax bill and can be claimed for up to four years. You cannot claim this credit in the same year you claim a Lifetime Learning Credit for the same student, and it is subject to certain income limits. You can’t take the credit if you are still dependent on someone else’s tax return either.
  • Lifetime Learning Credit: This is a tax credit of up to $2,000 for each eligible student with qualifying expenses. Like the American Opportunity Credit, it comes directly off your tax bill and is subject to income limits. Unlike the Opportunity Credit, there’s no cap on the number of years you can use the Lifetime Learning Credit. If you are dependent on someone else’s tax return — a parent, for example — you can take the credit yourself or your parent can, but not both.
  • Student Loan Interest Deduction: If your Modified Adjusted Gross Income (MAGI) is less than $80,000 for an individual or $160,000 for a married couple filing jointly, then you may take a tax deduction of up to $2,500 for interest paid on student loans. This is a deduction as opposed to a credit, which means it reduces the amount of income you pay taxes on.
  • Student Loan Cancellations: Normally, the IRS requires you to report debt forgiveness as income for tax purposes. However, in certain circumstances, student loan cancellation may be tax-free if you:
    • have a loan from a qualifying lender to help you attend school, and
    • the terms of the loan require you to work in a certain field for a set time for a particular employer type
  • Repayment Assistance: If another entity pays off part or all of your student loan for you, those payments may not count against your income if:
    • the repayment comes from the National Health Service Corps (NHSC) Loan Repayment Program
    • the repayment is part of a state education loan repayment program that is part of the Public Health Service Act
    • it’s a similar state loan repayment meant to increase the availability of health services in an area with a shortage of health professionals
  • Tuition and Fees Deduction: You can claim a tax deduction of up to $4,000 for tuition and fees you pay to a qualifying institution. It is a tax deduction, so it reduces the amount you pay taxes on and is subject to income limits. If someone else claims you as a dependent on your taxes, you can’t take this deduction.
  • Coverdell Education Savings Account: If you meet certain income guidelines, you can set up a Coverdell account to save for higher education expenses. One person can have multiple accounts, but $2,000 total per year is the maximum amount that can be deposited. Even though the contributions are taxable, the benefit of a Coverdell account is that the money grows tax-free until you’re ready to use it. Then when the money is used for qualifying education expenses, it doesn’t count as income for tax purposes.
  • Qualified Tuition Program (QTP): Also known as 529 plans, these programs operate at the state level and are available in all 50 states and the District of Columbia. Program regulations vary outside basic regulatory requirements through the Securities and Exchange Commission. There are two types: prepaid tuition and college savings.
    • With prepaid tuition, you buy units of tuition at today’s rate that will still be worth one unit when the student is ready to attend school, essentially locking in what you’ll pay for higher education.
    • With college savings, the investor chooses how he or she wants to invest the funds as they grow over time from a menu of possibilities that varies by state.
  • Education Exception to Additional Tax on Early IRA Distributions: Usually, early withdrawals from an IRA carry an extra 10 percent penalty on top of your tax rate. However, you can make withdrawals for qualifying education expenses without that additional penalty.

Form 1098-T

These types of credits and deductions are accessed through your tax return each year as opposed to filing a separate specific form. To get the information you need for your return, you’ll need Form 1098-T from your school. By Jan. 31 of each year, schools and other institutions of higher learning are required to give each student this document. It provides information on either the payments received or the billed charges to help students get their taxes filed correctly.

Pell Grants, loans, and scholarships may get the lion’s share of the headlines, but there’s significant money to be saved for students and their families by taking advantage of these tax benefits.