Tax benefits for students in graduate school

A question I received recently is what tax benefits are available for a student in graduate school? While the American Opportunity Credit is not available for graduate school, there are other tax benefits to help with the cost.

Lifetime Learning Credit

• For 2016, the credit is $2,000 of qualified education expenses for all qualifying students on the tax return, not per student.
  • The credit reduces the income tax you owe.
  • The credit is non-refundable.
• Unlike the American Opportunity Credit which can only be claimed for four years, there is no limit on the number of years the Lifetime Learning Credit can be claimed.
• Requirements:
  • You have paid qualified education expenses for the graduate school.
  • The expenses are for an eligible student (one who is enrolled in one or more courses at an eligible educational institution).
  • The eligible student is yourself, your spouse, or your dependent who you claim on your tax return.
• You cannot claim the credit if:
  • Your filing status is married filing separately.
  • You are listed as a dependent on someone else’s tax return.
  • Your modified adjusted gross income is at least $65,000 or $131,000 if married filing jointly.
  • You or your spouse are a nonresident alien.
  • You claim the Tuition and Fees Deduction.
• Qualified expenses:
  • Tuition.
  • Related expenses required for enrollment at an eligible educational institution.
  • Qualified expenses must be reduced by:
    • Tax-free educational assistance such as scholarships and grants.
    • Refunds of expenses.
  • Expenses that do not qualify:
    • Insurance.
    • Medical expenses such as student health fees.
    • Room and board.
    • Transportation.
    • Living expenses.
  • If the student pays the qualifying education expenses:
    • You can claim the credit only if you claim the student as your dependent on your tax return.
    • The student can claim the credit only if the student is not claimed as a dependent on someone else’s tax return.

Tuition and Fees Deduction

• The tuition and fees deduction reduces your income subject to tax by up to $4,000 of qualified education expenses.
• Requirements:
  • You have paid qualifying education expenses.
  • The expenses are for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent who you claim on your tax return.
• You cannot take the deduction if:
  • Your filing status is married filing separately.
  • You are listed as a dependent on someone else’s tax return.
  • Your modified adjusted gross income is more than $80,000 or $160,000 if married filing jointly.
  • You or your spouse are a nonresident alien.
  • You claim the Lifetime Learning Credit.
• Qualified expenses:
  • Tuition.
  • Related expenses required for enrollment or attendance at the eligible educational institution.
  • Qualified expenses must be reduced by:
    • Tax-free educational assistance such as scholarships and grants.
    • Refunds of expenses.
  • Expenses that do not qualify:
    • Insurance.
    • Medical expenses such as student health fees.
    • Room and board.
    • Transportation.
    • Living expenses.
  • Only the person who paid the expenses can claim the deduction.
    • If the student pays the expenses and is a dependent on someone else’s tax return, no one can take the deduction.
    • If the parent pays the expense and does not claim the dependent on their tax return, no one can take the deduction.
    • If someone else, such as a grandparent, pays the expenses directly to the educational institution, the student is treated as making the payments and is eligible to claim the deduction as long as she/he is not a dependent on someone else’s tax return.

Qualified Tuition Program (529 Plan)

Funds held in a Qualified Tuition Program can also be used to pay for the costs of graduate school.

• Qualifying expenses:
  • Those required for enrollment or attendance at an eligible educational institution:
    • Tuition and fees.
    • Books, supplies, equipment.
  • Expenses for special needs services for the student and are incurred because of the student’s attendance at the eligible educational institution.
  • Room and board expenses as long as the student is enrolled at least half-time.
  • Purchase of computer and peripheral equipment, software and internet service if it is to be used primarily by the student for college.
  • Qualifying expenses must be reduced by:
    • Tax-free educational assistance such as scholarships and grants.
    • Refunds of expenses.
    • Amounts used to claim the Lifetime Learning Credit or Tuition and Fees Deduction.
  • Distributions from the Qualified Tuition Program not used by qualifying educational expenses become taxable income to the recipient.

If you have questions or would like more information, please contact me.

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.