You may exclude certain educational assistance
benefits from your income. That means that you won’t have to pay any tax on
them. However, it also means that you can’t use any of the tax-free
education expenses as the basis for any other deduction or credit, including
the lifetime learning credit.If you receive educational assistance
benefits from your employer under an educational assistance program, you can
exclude up to $5,250 of those benefits each year. This means your employer
should not include the benefits with your wages, tips, and other
compensation shown in box 1 of your Form W-2.To qualify as an educational assistance
program, the plan must be written and must meet certain other requirements.
Your employer can tell you whether there is a qualified program where you
work.Tax-free educational
assistance benefits include payments for tuition, fees and similar expenses,
books, supplies, and equipment. The payments may be for either
undergraduate- or graduate-level courses. The payments do not have to be for
work-related courses. Educational assistance benefits do not include
payments for meals, lodging, transportation and tools
or supplies (other than textbooks) that you can keep after completing the
course of instruction or for courses involving sports,
games, or hobbies unless they have a reasonable
relationship to the business of your employer, orare required as part of a degree program.
If your employer pays more than $5,250 for
educational benefits for you during the year, you must generally pay tax on
the amount over $5,250. Your employer should include in your wages (Form
W-2, box 1) the amount that you must include in income.However, if the benefits over $5,250 also qualify as a working
condition fringe benefit, your employer does not have to include them in
your wages. A working condition fringe benefit is a benefit which, had you
paid for it, you could deduct as an employee business expense.
Tax credits, deductions and savings plans can
help taxpayers with their expenses for higher education.
Additionally, a tax credit reduces the amount of income tax you
may have to pay. On the other hand, a deduction reduces the amount of your
income that is subject to tax, thus generally reducing the amount of tax you
may have to pay. Furthermore, certain savings plans allow the accumulated
earnings to grow tax-free until money is taken out (known as a
distribution), or allow the distribution to be tax-free, or both.
An education credit helps with the cost of higher
education by reducing the amount of tax owed on your tax return. Currently there are two
education credits available through the IRS. These credits are the American
Opportunity Tax Credit and the Lifelong Learning Credit. There seems to be
more credits, but the other benefits available are not considered credits.
In order to take the American Opportunity Credit
or the Lifelong Learning Credit, you and your dependent or a
third party needs to have paid qualified education expenses for higher
education. Furthermore, an eligible student must be enrolled at an eligible
educational institution. You can only claim the American Opportunity Credit
for yourself, your spouse or for a dependent you list on your tax return.
Generally, you can claim the tuition and fees
deduction if you paid qualified education expenses of higher
education and the education expenses incurred are for an eligible student.
This eligible student is
