The U.S. government encourages education by allowing many deductions and credits for education expenses. In most cases, you can reduce your tax burden by deducting money spent on your own education as well as that of your spouse and/or your dependents. Deductions reduce the amount of income that is taxed and credits reduce the amount of the tax you owe, dollar for dollar. You may want to apply your expenses to a few different possibilities to find the best tax savings.
Tuition and Fees
Tuition and fees paid to qualified post-secondary institutions can be deducted from your income. You can only deduct fees that are required for attendance at a college, university or vocational school. Fees for extracurricular activities are generally not tax deductible, nor are expenses for room and board. There is a space for education-related deductions on form 1040 that is separate from the itemized deductions, which means you can deduct your tuition even if you choose to use the standard deduction. However, if you take this deduction, you cannot also claim the American Opportunity or Lifetime Learning credits.
For the tuition and fees deduction, books and other course material are only deductible if they are necessarily paid to the school. For example, if you purchased a textbook from the school bookstore for $50 and used it for your class, that $50 is not tax deductible even though it went to the school because you could have purchased the book elsewhere or borrowed one. But if you paid $50 to the school to rent a piece of equipment for a class and were required to rent it from the school, that $50 is likely a qualified deduction.
Student Loan Interest
You can deduct interest you paid on a loan as long as the loan was used to pay education expenses. For the purpose of student loan interest, books and room and board are qualified expenses. You are permitted to deduct interest on the loan that you paid voluntarily -- for example, if you made additional payments to pay off the loan faster -- or interest that someone paid for you, if you were the one legally required to pay that interest.
If you choose to itemize deductions, you can deduct job-related education expenses on Schedule A. You can only deduct these expenses if they are required by your employer to keep your present job or for education that improves your skills in your current job -- for example, to keep up with changing technology. Expenses you may deduct include tuition and fees as well as books and course supplies. You may also deduct travel expenses, such as mileage on your car. You may not deduct these expenses if they are reimbursed to you.
Most of the deductions you are entitled to claim from education expenses are limited by your income level. The limits are subject to change from year to year, so be sure you read the forms for the proper year. IRS publication 970 provides details on education deductions and credits and is an excellent source for additional information.