College Tax Deductibles You Probably Did Not Know About

In the past 20 years, the cost of attending college has tripled and increased almost 8 times faster than wages. While public higher education is mostly a state responsibility, the federal government does incentivize continuing education through tax deductions and tax credits.

To understand how you might take advantage of these tax deductions and reduce the amount of education tax credits as a college student or recent graduate, we’ve gathered 7 tax deductions and credits you should know to save the most money on your bill for the tax year.

Tax deductions work to reduce your taxable income. For example, if you earn $50,000 in adjusted gross income as a single filer and claim a tax deduction worth $1,000, your net taxable income becomes $49,000. With this income, you fall into the 22% income tax bracket, saving you $220 in taxes, all things equal.

What is a Tax Deduction vs. a Tax Credit?

Tax credits work to reduce your tax liability dollar-for-dollar. For example, take the same situation as above. If you have $50,000 in modified adjusted gross income, you fall in the 22% tax bracket and pay $6,790 in federal income taxes. ith capital losses and claim up to $3,000 in losses against your earned income.

A $1,000 tax credit reduces this dollar-for-dollar, meaning you now only owe $5,790. You can see why claiming the credits for tax is more valuable than tax deductions.

Credit for College Students on Taxes

1. Retirement Account Contributions (IRA)

It might seem odd to start with retirement when you’re just starting on your career journey or only have a weekend job, but this is a valuable tax deduction for students in the long run. Before picking a stock trading app to invest this money in, make sure you do your stock market research first.

2. Capital Gain Losses

If you trade stocks in a taxable account, you hopefully only make gains. But, we live in a realistic world. Not all of our investments will turn out to be winners. Depending on your state of residence, you may be able to start investing before the age of 21.

3. American Opportunity Tax Credit

If you pay your way for college, including tuition, fees, and other qualified higher education expenses, you may have the ability to claim the American Opportunity tax credit (AOTC) to lower your tax bill dollar-for-dollar.

Swipe up for more tips!