Tax Credits for Grad School Tuition

Grad school tax advantages are limited, but they do exist.

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The Internal Revenue Service is all in favor of continuing education and it offers a variety of benefits to taxpayers who pay for it. Grad school falls through the cracks when it comes to one tax credit, but this isn't to say that you can't take advantage of the other, or of a deduction instead. Your tuition expenses qualify if you're paying on behalf of yourself, your spouse, your child or most other dependents.

American Opportunity Credit

Two problems exist with claiming the American opportunity tax credit for tuition expenses: it expires at the end of 2012 unless Congress takes steps to extend it, and it doesn't apply to grad school. This credit only provides relief for tuition paid through the first four years of schooling after high school graduation. The American opportunity credit has a reputation for being the best available, but it won't do you any good if you have already earned a four-year degree.

Lifetime Learning Credit

Another tuition-related credit is the lifetime learning credit. It's smaller than the American opportunity credit, but its rules are a little less stringent. It applies to any post-secondary tuition – it's not limited to the first four years. Your child does not even have to attend school full-time. An occasional class here or there toward his graduate degree will qualify. The credit is equal to 20 percent of what you spend on tuition and mandatory course materials up to $10,000. If you spend $10,000, your credit is $2,000. If you earn too much, however, you won't qualify. If you're married, the lifetime learning credit phases out for those with modified adjusted gross incomes of $104,000 or more.

Tuition Deduction

If you don't qualify for the lifetime learning credit or the American opportunity credit, you have a third option. You can claim a tuition deduction for up to $4,000 spent on qualifying expenses. Grad school counts, but you can't include room and board costs, some textbooks, or any portion you paid for through tax-deferred savings, such as a Coverdell education savings account. You don't have to itemize to claim the tuition deduction – it's above the line on the first page of your Form 1040. Unfortunately, income limits apply to this deduction as well, although they’re a little more generous than for the lifetime learning credit. You can claim the full limit of a $4,000 deduction if you're married filing jointly and your modified adjusted gross income is $130,000 or less. Otherwise, you can only claim up to $2,000, and if you earn more than $160,000, this deduction isn't available to you at all.

Choosing Your Best Option

If you qualify for the lifetime learning credit, you can't also take the tuition deduction for grad school. You must choose between one or the other, at least in any given tax year. Your choice is a matter of figuring out which alternative adds up to the most dollars. Typically, the credit is a better deal for the majority of taxpayers. The lifetime learning credit maxes out at $2,000, whereas the maximum tuition and fees deduction is only worth $600 if you're in the 15 percent income tax bracket, or $1000 if you're in the 25 percent bracket.