Over the past 20 years, the cost of college tuition has tripled and has grown nearly 8 times faster than wages. While public higher education is mostly the responsibility of the state, the federal government does encourage continuing education through tax deductions and tax incentives.
To see how you can take advantage of these tax deductions as a college student or recent graduate, we’ve compiled 7 tax deductions and rebates you need to know to get the most out of your tax bill this year.
What is a tax deduction versus a tax deduction?
Tax deductions lower your taxable income. For example, if you earn $ 50,000 in adjusted gross income as a single submitter and claim a $ 1,000 tax deduction, your net taxable income is $ 49,000. With this income, you fall into the 22% income tax bracket, which saves $ 220 in taxes, all other things being equal.
Tax breaks lower your tax liability on a dollar-to-dollar basis. For example, take the same situation as above. If your adjusted gross income is $ 50,000, you qualify for 22% taxes and pay $ 6,790 in federal income tax. The $ 1,000 tax credit reduces that amount on a dollar-to-dollar basis, which means you now owe only $ 5,790. As a result, you understand why tax breaks are more valuable than tax deductions.
1. Contributions to Retirement Account (IRA)
It may seem odd to retire when you’re just starting out or only work on weekends, but in the long run it is a valuable tax deduction for students. Before choosing a stock trading app to invest that money, be sure to do your stock market research.
Regardless of how you choose to invest, the tax code rewards this behavior by offering you the option to deduct your contributions from your taxable income if you make them a traditional IRA. You can contribute $ 6,000 per year or your earned income, whichever is greater.
2. Losses from capital gains
If you are trading stocks from a tax-deductible account, you will hopefully only make a profit. But we live in a realistic world. Not all of our investments will pay off. Depending on the state of your residence, you can start investing up to age 21.
When you decide to sell losing positions, you can use these tax losses to lower your taxable income. Each year, you can offset your capital gains with capital losses and claim up to $ 3,000 in losses against your earned income. Any unused capital losses are carried forward indefinitely until you fully offset the capital gains in future years or until you use up your annual maximum deduction of $ 3,000 from earned income.
3. American tax credit
If you pay for your college tuition, including tuition, fees, and other expenses for qualified higher education, you may be able to apply for an American Tax Credit (AOTC) to lower your dollar-to-dollar tax bill.
This loan can be up to $ 2,500 per year for four years of post-high school graduation if you are at least part-time enrolled and working towards your degree. To get a full loan, you can claim the first $ 2,000 of qualified expenses and then up to 25% of the next $ 2,000 or $ 500 for a total of $ 2,500.
4. Loan for lifelong learning
Closely related to the American Opportunity tax credit, it also lowers your tax bill on a dollar-to-dollar basis, but only one can be claimed. A Lifetime Study Loan can help pay for undergraduate, graduate, or training courses.
This loan does not include a minimum amount for admission (which means that you do not need to be enrolled at least half the time) and you do not need to work towards earning your degree. Going forward, if you decide to go back to school to get additional credentials, or need to take a refresher course to maintain your licenses, you can apply a lifetime student loan to your tax account.
5. Tax rebate refund
Under the CARES Act, many Americans have received multiple incentive checks. If you are not declared a dependent on someone else’s tax return in 2020 and have not received your check, you can claim your tax refund tax credit on your return. People received these payments last year as a prepayment, but technically it counts as a tax credit on your 2020 return.
6. Withholding interest on a student loan
If you are one of the 42 million Americans with outstanding student loans, you can deduct the interest paid as part of your student loan payments. To be eligible for this deduction, you must pay at least $ 600 in student loan interest during the year and can withhold up to $ 2,500 per year. As with most deductions and loans listed here, you will need to meet certain income limits to qualify for this deduction.
7. Tax credit on earned income
If you are attending college as a senior student and are earning low to medium income, you may also be eligible for the Earned Income Tax Credit. The repayable nature of the loan means that even if your tax bill falls below $ 0 (meaning you must receive a tax refund), you can claim any negative balance resulting from the Earned Income Tax Credit.
For example, if you had a tax debt of $ 2,000 before you applied for the Earned Income Tax Credit, but that amount is $ 2,500, this would result in a negative tax bill of $ 500, which can then be refunded to you through a tax refund.
This article originally appeared on Your Money Geek and has been republished with permission.