What Is IRS Publication 970: Tax Benefits for Education?
Let me tell you about IRS Publication 970—it's a straightforward document from the Internal Revenue Service that lays out the tax benefits you can get if you're a student or family member saving or paying for college. It covers how taxes work for common funding sources like scholarships, fellowships, grants, and tuition reductions.
In this publication, you'll find explanations of two main tax credits: the American Opportunity Tax Credit and the Lifetime Learning Credit. Beyond that, it details nine tax benefits that can help you cut down on the income tax you owe.
Tax Benefits Outlined in Publication 970
These benefits include deducting interest on student loan debt, treating canceled student loan debt as tax-free, deducting tuition and fees, contributing to Coverdell Education Savings Accounts which are tax-advantaged, and joining qualified tuition programs. You'll also learn about cashing in savings bonds tax-free when used for education, making penalty-free withdrawals from retirement accounts, and deducting education expenses from business income.
Key Takeaways
- The tax credits and benefits are available to students saving for or paying education costs for themselves, and sometimes for another family member.
- Most of the tax credits and benefits outlined in Publication 970 apply only to higher education—colleges, universities, conservatories or post-graduate programs.
- Student loan interest deductions and learning credits are dependent on adjusted gross income and are phased out on incomes above a certain annually adjusted level.
Other Relevant Forms
If you're claiming these education credits or deductions, you'll need Form 1098-T, the Tuition Statement, which has the educational institution's employer identification number. You also have to file Form 8863 to claim the American Opportunity and Lifetime Learning Credits. Even if you haven't received Form 1098-T, under certain conditions, you might still be able to claim the credit.
IRS Publication 970 and the Federal Budget
Tax experts often call these kinds of tax breaks 'tax expenditures' because they're designed for specific purposes. Publication 970 gives you a detailed look at the ones Congress has set up to encourage education and training for Americans.
For example, tax credits and deductions for post-secondary education cut federal tax revenues by about $9.3 billion in 2021, and that's expected to jump to $14.6 billion in 2022. Another big one is the student loan interest deduction, which reduced taxes by $2.1 billion in 2021 and is projected at $2.3 billion for 2022.
IRS Publication 970 and Updates
There was a lot of talk about college students' tax situations during the 2017 tax reform debates. Early versions of the bill would have taxed tuition waivers, which hit graduate students hard since many rely on them to afford school. After protests, the bill was changed to keep tuition waivers tax-free. Then, the Bipartisan Budget Act on February 9, 2018, extended some benefits and added new ones.
Remember, Publication 970 gets updated regularly to match any changes in the tax code or regulations.
Download IRS Publication 970: Tax Benefits for Education
You can find all versions of Publication 970 on the IRS website, along with the latest developments.
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