Graduate school can be overwhelming enough in itself and then every year the time comes to do your taxes. In the next few paragraphs I’ll try to shed some light on some possible deductions and credits as well as the impact of grants and scholarships on your taxable income. This article is not meant to be tax advice or to replace seeking advice from a Certified Public Accountant. What this article will hopefully do is provide you with some information that will help you figure out what questions to ask when doing your taxes.
Deductions and Credits:
First off, let’s clarify the difference between a deduction and a credit. A deduction reduces your taxable income but its overall impact depends on your tax bracket. A credit, on the other hand, reduces your tax bill by the amount of the credit.
Depending on how much you made in 2011 you may be able to deduct the interest on your graduate school student loans. If your modified adjusted gross income was less than $75,000 in 2011 (or $150,000 if filing jointly) and you were enrolled in graduate school at least half-time, you might be able to deduct up to $2,500 of your student loan interest paid in 2011.
There is also a tuition and fees deduction that is available for higher education expenses. Another option is the Lifetime Learning Credit. Unlike some other deductions or credits (such as the American Opportunity tax credit), the Lifetime Learning credit is available for people enrolled in graduate school. It is a tax credit of 20% of tuition (up to $2,000 on the first $10,000 of tuition expenses). You cannot take the tuition and fees deduction and the Lifetime Learning Credit. Which one is best for you will depend on the various eligibility factors, including income.
Scholarships and grants that are used by a degree candidate to pay for tuition, fees and other eligible expenses may not have to be included in your gross income. It is true that some scholarships and grants are considered taxable and have to be included in your gross income. You should receive a W-2 for these. However, most grants and scholarships that are used for tuition and fees are not considered taxable income. You should seek the advice of a tax professional if you are unsure whether or not grants and/or scholarships you received in 2011 are considered taxable income.
With a little bit of research you may find that you are able to deduct some of your graduate school expenses or receive a credit for them. Either way…every little bit counts! For more information see the Internal Revenue Service Publication 970: Tax Benefits for Education or contact a tax professional for advice.