As a student, it is important that you understand tax credits and deductions, which can help make education more affordable. Tax credits reduce the total amount that you owe in taxes by a certain dollar amount. On the other hand, tax deductions lower your total amount of taxable income for the year. Below are the most common credits and deductions used by students to limit their tax liability.
The American opportunity tax credit is a credit that helps cover qualified education expenses during the first four years of higher education. Eligible students can get a maximum annual credit of $2,500. If the amount of tax you owe is brought to zero by the credit, 40 percent of the remaining credit amount (up to $1,000) can be refunded to you. The credit amount is 100 percent of the first $2,000 and 25 percent of the next $2,000 in qualified education expenses paid for each eligible student.
AOTC | Internal Revenue Service (irs.gov)
The lifetime learning credit (LLC) helps eligible students pay tuition and related expenses. The credit applies to undergraduate, graduate and professional degree courses. This includes courses that are taken to acquire or improve job skills. There is no set limit on the number of years you can claim the credit. LLC is worth up to $2,000 per tax return. The LLC is less liberal with qualified expenses when compared to the AOC; the credit mostly applies to fees paid directly to the institution. For example, while the AOC covers textbook costs, the LLC does not. For this reason, students who qualify for the AOC typically choose it over the LLC.
LLC | Internal Revenue Service (irs.gov)
Your student loan interest is the amount you paid in interest on a qualified student loan during the year. This includes both required and voluntarily pre-paid interest payments. You may deduct either $2,500 or the amount you paid in interest during the year, whichever is less. When your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status, the deduction is eliminated.
Topic No. 456 Student Loan Interest Deduction | Internal Revenue Service (irs.gov)
If you are employed at the same school that you are enrolled in, you may be temporarily exempt from paying Social Security taxes. However, this only applies to you if you have obtained employment because of your enrollment in the school. In addition, the exemption only applies to the wages you are paid by the university (as your employer), not wages you earn from other employers. The student Social Security tax exemption may not apply to those completing post-medical school residency and training.