Identification

• You can deduct school expenses and receive financial aid. However, financial aid might impact your ability to take a credit or deduction. As of 2011, Internal Revenue Service tax code requires you to subtract grants, scholarships and other reimbursements from your expenses. For example, if you have $20,000 in educational expenses and receive a $4,000 Pell grant, you only have $16,000 in potentially deductible expenses.
  
  

Qualified Expenses

• If you want to deduct education expenses or take a credit, you can only include tuition, fees, supplies and books, while excluding the cost of classes for hobbies, sports or games unless your degree plan requires them. The tuition tax deduction is limited to $4,000, the American Opportunity credit to $2,500 and Life Learning credit to $2,000. In general, you want to take a credit, because it is a dollar for dollar reduction on your tax bill, while a deduction is a multiple of your tax bracket. For instance, if you qualify for the maximum $4,000 tuition deduction and are in the 35 percent tax bracket, the deduction only lowers your bill by $1,400, but the American Opportunity credit would take $2,500 off of your tax bill.
  
  

Considerations

• Refer to IRS Publication 970 for certain situations that may apply to you. For example, you cannot deduct expenses if you pay for them with tax-preferred funds, such as those from a Coverdell savings plan. You cannot take any education tax break if you file married, but separated, or if someone can or does claim you as a dependent. You also must go to an accredited instituted approved by the U.S. Department of Education.
  
  

Tip

• If you go to school for business needs, such as to improve skills at your job, you may be able to deduct those costs as an employee expense, but they must exceed 2 percent of your adjusted gross income. If you are self-employed, you get to deduct business expenses from your gross income. This may qualify you for other deductions and for more aid next year, because the FAFSA uses your adjusted gross income when calculating how much your family should pay for college.