Tax Deductions for Low-Income Students

Knowing which tax deductions and credits to use can save you quite a bit of money. As the government wishes to help those in school or those thinking of attending, there are many great tax breaks to help defray the high costs of education for low-income students and those who wish to pursue a degree.

Significance

Tax breaks for students allow them to lower the amount of money that they are taxed on, amounting to significant savings. Like other deductions, there are guidelines to deductions taken for school-related expenses. Low-income students can benefit from deductions, putting them into a lower tax bracket.

Tuition and Fees Tax Deduction

One tax deduction that low-income students can use is the above-the-line deduction for tuition and fees paid throughout the year. An above-the-line tax deduction allows the user to take the deduction alongside a standard deduction. (Many deductions cannot be combined this way.) This is a great way for any low-income student to reduce her gross adjusted income to save on tax expenses. The maximum amount that can be deducted is $4000 and varies by overall income level.

Lifetime Learning Credit

Low-income students are eligible for the Lifetime Learning Credit, which is a credit rather than a deduction. Whereas a deduction decreases your adjusted gross income, a credit is an amount deducted from the actual calculation of taxes owed to the Federal Government. With the Lifetime Learning Credit, a student can deduct 20 percent of school-related fees and expenses up to $10,000, with a maximum of $2000.

American Opportunity Credit

The American Opportunity Credit is a new tax credit passed for the 2009 tax season. It is an expansion and renaming of the previous credit called the Hope Scholarship Credit. The American Opportunity Credit allows for 100 percent of tuition, fees and book expenses to be refunded to low-income students up to $2000 and 25 percent of the next $2000 spent. There is a $2500 maximum cap for this benefit and if you are in a low tax bracket, this money can even be refunded to you up to 40 percent of the benefit, or a $1000 maximum. This is perfect for low-income undergraduate students.

Warning

Although there are several ways to reduce your tax liability, as a student you can only take advantage of one of these programs. One caveat to all of these credits and deductions is that no one can claim you as a dependent. Consult your tax representative to see which program benefits you the most.

References

• College Student Tax Credits and Deductions
• American Opportunity Credit: Questions and Answers