It’s almost tax time again, and that means it’s time for nursing students to take advantage of all of the awesome tax deductions and credits. These deductions and credits could save you thousands of dollars on your tax bill, so don’t miss out on them!
While this article is not meant to be specific tax advice (you should always consult a tax professional), I’m going to outline the most important tax deductions currently available. If you’ve already filed your tax return and missed any of these tax benefits this year, you may be able to amend your tax return and take advantage of them.
In addition, make sure you watch our presentation on how to save thousands of dollars in tuition, which also includes some information on tax deductions:
Tax Deductions and Credits for Nursing Students
The most important tax benefits for students to consider include the tuition deductions and/or credits. These credits or deductions generally cover things like qualifying tuition, books, and other university fees/expenses. You normally can’t deduct amounts for which you received scholarships or financial aid, but if you only received partial financial aid or scholarships, you can generally deduct the amount you paid out-of-pocket.
There are four primary education deductions/credits available, and students can only claim one of the credits below per tax year (no double dipping!). Here’s a brief overview of the four main deductions or credits that students can take:
The American Opportunity Tax Credit
This tax credit is perhaps the most beneficial, as students could get up to $2,500 back each year. This is only available for students seeking a degree at a qualifying institution, and the student cannot have already obtained a 4-year degree (or previously claimed the Hope credit for four previous years). Even if you do not owe tax on your tax return, up to $1,000 of this credit could be refundable to you (but students under age 24 may not be eligible for the refundable portion).
Generally speaking, as long as the student is seeking a degree, has not already completed a 4-year degree, and does not have a felony or drug conviction, they’ll probably be eligible for this deduction. It can only be used for up to four tax years.
To claim this credit, you’ll have to fill out IRS form 8863.
Lifetime Learning Credit
This tax credit is the perhaps the next best credit. This credit is available for students at the graduate or undergraduate level, and students can get as much as $2,000 back per year (20% credit up to $10,000 in paid tuition). Unlike the American Opportunity Credit, there is no limit to the number of years that students can claim the Lifetime Learning Credit.
This is best if you’ve already claimed the American Opportunity Tax Credit for four years, if you’re in graduate school, or if you don’t meet the requirements for other credits.
To claim this credit, you’ll have to fill out IRS form 8863.
Tuition and Fees Deduction
This deduction isn’t as beneficial as other credits, because it only lowers the amount of taxable income, whereas the other credits above give you a direct credit back. However, it can be helpful if you don’t qualify for other deductions, or if you can benefit from lowering your AGI (adjusted gross income) on your tax return.
Students can reduce their taxable income by up to $4,000, which reduces their overall tax liability. Unfortunately, this tax deduction cannot be refunded—it only reduces your tax bill a bit. That’s why the credits usually end up putting more money in your pocket.
Unless you have some reason to lower your adjusted gross income (such as trying to qualify for another deduction), the other two tax credits mentioned above are probably the better option for students. Nevertheless, this is definitely one option to keep in mind.
To claim this credit, you can deduct the amount on the front of form 1040.
Student Loan Interest Deduction
Finally, the Student Loan Interest Deduction is perhaps the least beneficial tax deduction. This deduction is for interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
Much like the “Tuition and Fees Deduction” mentioned above, this deduction can reduce the amount of your income subject to tax by up to $2,500. Therefore, it only reduces your tax bill a bit, and it’s not as powerful as a credit. Nevertheless, it can help you save some money on your taxes, especially if the other deductions or credits above don’t help.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040’s Schedule A.
Conclusion about Tax Deductions and Credits
While you can only choose one type of deduction or credit, the IRS allows students to choose the deduction or credit that will benefit them most. It pays to do the math! As I said above, the American Opportunity Credit (AOC) is probably best for undergrad students (in most cases), but the other credits or deductions can also benefit students who don’t meet the AOC requirements.
For more information about the restrictions, requirements, and benefits of each of the above tax deductions/credits, you can visit the IRS.gov website. You can also view the forms for each tax credit (form 8863 for Lifetime Learning Credit and American Opportunity Credit; and Form 1040 for the others). Remember, the IRS often changes the requirements or amounts of credits yearly, so it pays to review all of the available deductions and restrictions each year.
Finally, don’t forget to consult with a tax advisor to make sure you qualify for the deductions or credits. Software such as TurboTax is also a great way to find deductions or complete your taxes.