Graduate School Tax Deductions
When in graduate school, educational costs can leave you short of money. However, the Internal Revenue Service offers taxpayers several tax breaks for graduate school expenses that can put some money back in your pocket when you file your income taxes. Knowing which tax break to claim can save you more money on your return.
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Tuition and Fees Deduction
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The tuition and fees deduction reduces your total taxable income by up to $4,000 as of 2010. You can claim this deduction if your modified adjusted gross income does not exceed $80,000 ($160,000 if married filing jointly). This deduction is an adjustment to income, which means the IRS allows you to claim this deduction without itemizing your deductions. You must use form 1040 or 1040A to file your taxes to claim the tuition and fees deduction.
Lifetime Learning Credit
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The lifetime learning credit offers an income tax credit for graduate school expenses. You can reduce your tax liability, not your taxable income, by up to $2,000. The exact amount equals 20 percent of your qualifying educational expenses up to $10,000. In order to claim this credit, you must complete Parts III and V of Form 8863 and then report the credit on your form 1040 or 1040A income tax return.
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Limitations
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The IRS prohibits taxpayers from taking more than one deduction for graduate school expenses. For example, a taxpayer cannot claim both the tuition and fees deduction and the lifetime learning credit. If you qualify for both, you are usually better off claiming the lifetime learning credit because it directly reduces your tax liability. This deduction is usually taken by higher income taxpayers who do not qualify for the lifetime learning credit, because it will generally not reduce your total taxes by as much as the lifetime learning credit.
Qualifying Expenses
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Only expenses required by the school can be used to qualify for these tax breaks. Qualifying expenses include your tuition and any mandatory fees, but not housing or food costs. You cannot claim a deduction or credit for expenses paid for by scholarships. However, you can claim expenses that you paid for with loans that you take out. The tax breaks are claimed for qualifying expenses paid during the tax year for classes beginning that year or in the first three months of the following year.
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