The kids are back in school! Things like student loans, scholarships, and fellowship grants can play a role in parents’ and college students’ tax liability. Let’s look at how education costs can impact your taxes.
Student Loan Forgiveness
Student debt is a hot topic. As of July 2023, total U.S. student loan debt stood at $1.774 trillion while the average federal student loan balance was $37,717. The Supreme Court struck down President Biden’s plan to provide blanket loan forgiveness to all student borrowers so he teamed with the Department of Education to announce a new proposal. The new rule expands on established law that provides debt relief for borrowers who made at least 240 or 300 monthly payments on their loan. The calculation now includes months where payments were late, partial, or deferred and helps those who have held student debt for a long time. We await a proposal to help more recent borrowers and those who stopped paying on their loans altogether.
IRS Publication 970: Tax Benefits of Education is a great resource regarding income, deductions, and credits.
Income
Scholarships and fellowship grants are not included in taxable income if certain conditions are met. The student must be a candidate for a degree at an eligible educational institution. The proceeds must be used for qualified expenses including tuition and fees, books, and other course-related expenses. They cannot be used for room and board, research, travel, and other expenses that aren't required for enrollment or attendance at the institution. Scholarships and fellowship grants are taxed as ordinary income if they do not meet the requirements.
Deduction
You can deduct student loan interest payments of up to $2,500 per return if certain conditions are met. This deduction phases out with modified adjusted gross income (MAGI) between $70,000 and $80,000 if single and $145,000 and $175,000 if filing jointly. If you qualify, you can take this deduction even if you don’t itemize.
Credits
Education costs can generate an American Opportunity Tax Credit (AOTC) and/or a Lifetime Learning Credit (LLC). You can only claim one of these credits each year for each qualifying student but you can claim different credits for different students in the same year. They phase out with MAGI between $80,000 and $90,000 if single and $160,000 and $180,000 for joint filers.
The AOTC provides a credit of up to $2,500 for adjusted qualified education expenses paid for each eligible student. The AOTC is the sum of:
100% of the first $2,000 of qualified education expenses you paid for the eligible student, and
25% of the next $2,000 of these expenses.
Up to 40% of this credit or $1,000 is refundable. It’s available for up to four years of study per eligible student who has not already completed four years of postsecondary education. To qualify, the student must be enrolled at least half-time for at least one academic period and must not have been convicted of a felony for possessing or distributing a controlled substance.
The LLC offers a credit of up to $2,000 per return. The LLC is 20% of the first $10,000 of qualified education expenses you paid for eligible students. Qualified expenses include tuition and fees required for enrollment or attendance as well as amounts required to be paid to the institution for course-related books, supplies, and equipment. You can claim the credit even if the student withdraws unless the payments are refunded. The LLC is nonrefundable so it can only offset tax liability. There is no limit to the number of years it can be claimed for each student and it can apply to courses taken to acquire or improve job skills. Generally, you must receive Form 1098-T from the institution to take the credit. If the institution isn't required to furnish it, you must be able to demonstrate that the student was enrolled at an eligible educational institution and substantiate your payment of qualified expenses. If the institution is required to provide it but you haven't received it, you can still take the credit if:
After January 31 but before you file your return, you ask the institution to provide it to you,
You fully cooperate with their efforts to gather the required information, and
You qualify for the benefit, can demonstrate that you were enrolled at an eligible institution, and you can substantiate the payment.
It turns out that a great education can pay off in life AND in taxes!
Sign up for our newsletter.
At Oak City Payments, we have a deep understanding of the unique financial challenges and opportunities faced by breweries and distilleries. With nearly 15 years of experience in the alcohol industry, our team is passionate about this specialized sector. We're here to make sure your business thrives, whether you're crafting small batch bourbon in Asheville or craft beer in Wilmington. We know North Carolina -- and we know alcohol.
Our founder, Allen Jackson, has a background in the alcohol industry. HIs passion drives our commitment to supporting breweries and distilleries at every stage of their journey. Whether you're a startup craft brewery or an established distillery, we have the knowledge and resources to address your payroll, payments, and accounting needs.
From payroll services specifically tailored to the unique needs of breweries and distilleries to wholesale solutions designed to optimize inventory management, Oak City Payments offers a suite of services to support your business. Our goal is to alleviate administrative burdens by providing the tools and support you need to focus on what you do best—crafting exceptional brews and spirits.
Oak City Payments is proud to be a trusted partner for breweries and distilleries across the Tar Heel State.. With our deep industry knowledge and personalized service, we are dedicated to helping alcohol businesses succeed and thrive in an increasingly competitive market. Cheers to a long-term partnership!