Best Tax Credit for Graduate Students

By | February 26, 2014

What are the best student tax tips for graduate students?

The “big three” tax credits are the Lifetime Learning Credit, the American Opportunity Credit, and Qualified Tuition and Qualified Education Expenses.

Graduate students are generally not eligible for the American Opportunity Credit, because they are well beyond their fourth year in post-secondary education.


What is the Lifetime Learning Credit?

The Lifetime Learning Credit is non-refundable (as shown under “What is the tax benefit of the lifetime learning credit” here. If a taxpayer is already going to get a refund, even without this credit,  does that mean taking advantage of this credit will not benefit when taking the credit?


Best Tax Credit for Graduate Students

The last option is Qualified Education Expenses, which you can view here. Even though tuition was paid with a student loan, a graduate student can claim up to $4,000 of tuition as a Qualified Education Expense, thereby reducing taxable income by $4,000 (and possibly netting us a larger return in the process). This is probably the best option for most graduate student taxpayers

Generally unless your income is above $160,000 you won’t have more benefit from using the tuition deduction than you would from the credit. Plan on the lifetime learning credit, but don’t be afraid to plug in the deduction instead into an online tax preparation program, to see what happens.


Refundable Tax Credit Explained

Let’s assume you worked all year, but you didn’t withhold anything for federal taxes. Let’s say your tax was calculated as $2000 for the whole year. Let’s also say you qualified for the antoinne85-is-awesome credit, which is a $3000 non-refundable credit. Since your tax came to $2000, you’d be able to take up to $2000 of this credit and owe no tax to Uncle Sam. Now, if that credit was a refundable credit, you’d reduce your tax bill by the first $2000, then the IRS would pay you $1000 on top of that (the difference between your tax bill and the full credit). Most credits aren’t refundable.

In both of the above examples you’d end up getting back any withholding you had for the year, since your total tax ended up being zero. This information should be applicable for must graduate students claiming educational tax credits or deductions.