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Higher Education Costs Can Reduce Taxes

by | 52 tax Tips and Weekly Financial Blog for 2023


It’s ‘Back to School’ time and every one of you must be busy preparing for the academic year ahead. Along
with students, even parents are busy gearing up for the new school year. Education is a holistic process, where
the students are the ones who focus on studying, but you parents are also equally involved in ensuring that your
students are getting access to the best of resources throughout their school years. Trina and Paul are parents to
teenagers, who are all set to fly out of their nest. So, while the parents are psychologically preparing themselves
to beat the empty nest syndrome, they are also actively looking out for options that can be availed to benefit
them financially, at a time when big expenses like tuition fees are awaiting them.
Since school is back in session, so let’s discuss some school tax benefits while it’s fresh in peoples’ minds.

Tuition Expenses

Tuition expenses are available up to $4000. Tuition credits are limited, based on adjusted gross income. Parents
can take this deduction if paying for education expenses for themselves, or their children and other dependents,
if they claim the child or dependent on the tax return. Be sure to only claim what you pay for, what the 1098-T
(this is the form the school sends every January for the past year) says the tuition amount is. The form 1098-T
comes to the address of the student, even though the parents might pay the tuition. Be sure you keep the form
1098-T when preparing your tax returns, in order to prove the amount paid for tuition, along with your receipts
of payments made. Grants and scholarships that pay for tuition are not payments you can take on your return,
but they do reduce the costs of school. You can only claim what you pay for. Be sure to include books, fees, and
supplies you pay for as well in the education expenses. Depending on your income and circumstances, you
might be able to get a deduction without itemizing or take a tax credit; whichever is better.

The American Opportunity Credit is:

● Worth up to $2,500 per eligible student.
● Only available for the first four years at an eligible college or vocational school.
● Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
● For students earning a degree or other recognized credential.
● For students going to school at least half-time for at least one academic period that started during the tax
● For the cost of tuition, books and required fees and supplies.


The Lifetime Learning Credit is:

● Limited to $2,000 per tax return, per year, no matter how many students qualify.
● For all years of higher education, including classes for learning or improving job skills.

● Limited to the amount of your taxes.
● For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.


For both credits:

● Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure
it’s correct.
● You must file Form 8863, Education Credits, to claim these credits on your tax return.
● You can’t claim either credit if someone else claims you as a dependent.
● You can’t claim both credits for the same student or for the same expense, in the same year.
● The credits are subject to income limits that could reduce the amount you can claim on your return.
● Employers can deduct up to $5250 (for 2023) as Post-Secondary Education Degree Program Expenses, per
employee, through the business, without the employee paying taxes on the money. (This benefit can save
taxes for both the employee and the employer.)

● Consider hiring your family and then certain college expenses can be a deduction in the business, if the class
is necessary for the employee’s job (See the point listed above and consider where it’s better to hire your
kids through your existing business as employees. Then the college courses or programs might be a
complete deduction through your business as an expense. It’s possible to even get a tax deduction through
the business for college expenses AND can get an education credit for the same expenses; either for the
parent and/or the child. Be sure to see your tax preparer to find out the specifics for your circumstances.)

● Employers can also deduct College Education classes paid for employees. The Employer’s company may
pay for the college classes for employees if there is no discrimination among employees and if the classes
will improve the existing job skills of the employees taking the class. If the class is not relevant to the
existing job description of the employee, then the previously mentioned limit of $5,250 applies as an
employee fringe benefit.


Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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