Looking to save money on online college costs and cut the expense of online education? You may be able to deduct some—or all—of what you spend on distance learning from your income tax bill by using education tax deductions.
Tax deductions are a great form of financial aid. Tax deductions are subtracted from your total taxable income. They may reduce what you owe the IRS by putting you in a lower income category.
For example, if you make $36,000, and you qualify for $4,000 in higher education deductions, you can subtract this amount from your income. This means your adjusted income is only $32,000. You only pay taxes on this amount, not $40,000.
For 2012, a single taxpayer making $32,000 will be assessed $4,365 in federal income taxes. One who makes $36,000 will be charged $5,188—a difference of $803.
Not everybody will see this much savings by using federal income tax deductions for education. Some people might find that education tax credits save them more money than deductions.
(Tax credits are subtracted directly from your tax bill, rather than deducted from your income. For more information about credits, see Best Tax Credits for Online Education.)
~ Income limit (modified adjusted gross income) is $80,000 ($160,000 if filing jointly)
~ Not available if you are married filing separately
You may be able to deduct as much as $4,000 in qualified higher online education expenses from your income.
~ Income limit (modified adjusted gross income) is $75,000 ($150,000 if filing jointly)
~ You can claim up to $2,500 in interest paid annually on student loans (what you pay to reduce the principal is not covered)
~ Not eligible: interest paid on loans from relatives or employers
Those who itemize deductions and who have taken work-related education (that is, education required by your employer or used to maintain or improve skills needed in your job)
~ Limits: Only expenses that amount to more than 2 percent of your adjusted gross income qualify. (For example, if you make $50,000 annually, you can only claim expenses over $1,000.)