Tax Credits for Graduates

College graduates full of hope and promise enter the workforce looking to leave their mark on the world. Unfortunately, some also enter the workforce facing mounds of debt and uncertain job prospects. Understanding available tax credits can help college graduates ease into their career and maintain their sanity when it comes to money and taxes.

  1. Tax Credit Basics

    • Whether pursuing postsecondary education or taking part in continuing education courses, qualified individuals can take advantage of one of two tax credits. Both of these credits, the lifetime learning credit and the American opportunity credit, effectively reduce the amount of income tax the taxpayer will owe. Taxpayers are allowed to choose the credit option that provides them with the most benefit provided they meet the qualifications of the tax credit.

    Tax Credit Options

    • The American opportunity credit allows taxpayers to take a credit for qualified educational expenses for the first four years of postsecondary schooling. Unfortunately, this credit doesn’t provide much help for graduates beyond possibly the first year after graduation. In contrast, the lifetime learning credit is available beyond the first four years of college. Graduates may find the credit useful if they decide to return to school or seek out additional educational opportunities. Eligible taxpayers can deduct specific education expenses, such as books, tuition and fees. The amount of the credit represents 20 percent of the initial $10,000 spent on educational expenses and is capped at $2,000.

    Interest Deductions

    • Those graduates, who enter the workforce with student loans weighing heavy on their mind, need to consider other credits and deductions. The payments made to the student loan lender will go toward principal and interest. Graduates who can claim an exemption for themselves can deduct up to $2,500 for student loan interest paid to the lender on their tax returns. While not a true credit, this deduction does help reduce overall tax liability.

    Considerations

    • Graduates can take advantage of several other options when looking for ways to reduce the amount of income tax they pay during their working years. For instance, alumni memberships and donations to your alma mater are tax deductible. If your job requires you to relocate, some of the expenses related to the move can be deducted on your income tax, effectively giving you a credit. Allowable deductions related to moving expenses include mileage and lodging expenses.

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