Unless you were born with a silver spoon in your mouth or the ability to perform a jump shot on par with LeBron James, your or your children’s college education is going to cost you. In-state public colleges cost an average of $19,548 per year, and private universities boast a massive average tuition price of $43,921, according to the College Board. College seniors who borrowed money to pay those costs now graduate with an average of $28,950 in student loan debt, reported by the Institute for College Access & Success.
Despite the fact that you cannot fully escape high tuition costs, there are ways to alleviate some of the financial burden. The Federal Government currently offers four incentives – tax credits and deductions – that can save you bundles of cash at tax time. A tax credit is one that directly reduces the amount of tax you owe, while a deduction reduces the amount of income on which your tax is calculated.
Tax Deductions & Credits for College Students
Up to $2,500 Tax Credit, up to $1,000 refundable, Four Years Maximum Per Student
To claim this credit, you must have paid educational expenses either for yourself or for one of your dependents at an eligible post-secondary institution, and the eligible student must not have completed the first four years of his or her post-secondary studies. Expenses include tuition, required fees, college text books, and other required class supplies.
This is a direct dollar-for-dollar credit for the first $2,000 of eligible expenses; thereafter, you can recoup 25% of eligible expenses up to a maximum total credit of $2,500. Up to $1,000 of this credit may be refunded to you if your tax obligation is zero.
- You can claim one credit per student, per year. Therefore, if you have multiple students, you can take this credit for each of them during the same year.
- To be eligible for any of the credit, your MAGI (modified adjusted gross income) must be less than $90,000 if filing single or head of household, or $180,000 or less if married filing jointly. However the amount of the credit you’re eligible for phases out once your MAGI exceeds $80,000 or $160,000, respectively. You cannot claim this credit if you are filing as married filing separately.
- If you are due a refund, up to 40% of this credit can be refunded to you, for a maximum refund of $1,000.
- The student must be enrolled at least half-time and have no felony drug convictions.
- The academic period to which expenses pertain must have begun during the same year expenses were paid, or during the first three months of the following year. In other words, expenses paid in 2015 for classes that commenced in 2015 would be eligible if all other criteria are met. If you paid for classes in December of 2015 that started in January of 2016, these expenses would also be eligible. However, if you paid for classes in December of 2015, that started in May of 2016, you could not claim these expenses for the American Opportunity Credit for tax year 2015.
Up to $2,000 Tax Credit Per Return, non-refundable, can be claimed for an unlimited number of years
The Lifetime Learning Credit allows you to get a tax credit for tuition, fees, and required books and supplies for classes taken at any qualified educational institution. This tax credit does not have a limit on the number of years that it can be taken. If you continue to have eligible expenses, you can take this credit each year indefinitely.
Unlike the American Opportunity Credit, the student does not need to be enrolled in a degree-seeking program. Furthermore, he or she can be a graduate student, and you can get this credit for just a single class. You can deduct expenses paid for yourself, your spouse, or for any of your dependents as long as those expenses are required to be paid to the educational institution as a condition of enrollment or attendance.
- This credit is not refundable. You can only get your tax burden reduced with this credit – you can not get a refund in excess of the amount of tax you owe.
- The $2,000 maximum benefit covers qualifying expenses paid for yourself, your spouse, and your dependents. It’s simply based on expenses accrued, and does not take into account the number of students. If more than one person is taking classes, you may get more benefit from the American Opportunity Credit, which you can claim on a per student basis.
- You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student. However, if two students have qualifying education expenses, you may claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other.
- Your MAGI must be less than $65,000 if filing single or head of household, or less than $130,000 if married filing jointly. You cannot claim this credit if you file as married filing separately.
- Students with a past felony drug conviction are eligible.
- The academic period expenses are claimed for must have commenced during the same tax year or within the first three months of the next year.
Up to $4,000 Tax Deduction Per Return
The tuition and fees deduction allows you to take up to $4,000 off your taxable income per year. You can deduct tuition, fees, and expenses required to be paid to qualified educational institutions as a condition of enrollment. You do not have to itemize your deductions to receive this benefit. The expenses must be paid for you, your spouse, or your dependents. There is no limit on how many years you can take this deduction.
- Your MAGI must be $80,000 or less if single or head of household, and $160,000 or less if married filing jointly. You cannot take this deduction if you are filing as married filing separately or if you can be claimed as a dependent on someone else’s return.
- You are limited to a deduction of $4,000, even if you have multiple students in the family.
- This deduction can be valuable if you’re unable to take the Lifetime Learning Credit because your income is too high.
- The academic period expenses are claimed for must have commenced during the same tax year or within the first three months of the following year.
Up to $2,500 Tax Deduction Per Return
You can deduct up to $2,500 for interest you paid during the year on qualifying student loans, and you do not need to itemize to take this deduction. Qualifying educational loans can be taken on behalf of yourself, your spouse, or your dependents. However, you cannot deduct interest on loans you are not currently paying on – whoever pays the interest gets the deduction.
Furthermore, you’re not eligible to deduct student loan interest if you are claimed as a dependent on someone else’s return. For example, if you claim your child as a dependent and they are paying the interest on a qualifying student loan, neither one of you can take the deduction.
- Your MAGI must be less than $80,000 (single, head of household) or $160,000 (married filing jointly)
- You cannot deduct interest on a loan made to you by a relative or your employer.
- The loan must have been used to pay for tuition, fees, books, or housing expenses.
- Housing expenses qualify only up to the actual cost of housing and meals at the university, or an amount determined by the educational institution that was included in the federal financial aid determination. (If the student took out extra loans to cover a higher housing expense than what was set as the allowance by the institution, those amounts are not eligible.)
- The determination of eligibility of an institution is made only at the time that the loans are taken out – if they subsequently lose eligibility, it doesn’t affect whether you can deduct the loan interest.
- You can also deduct loan origination fees at the time the loan was made, and you can deduct credit card interest if the credit card is used solely for eligible academic expenses.
- You cannot deduct student loan interest if you or your spouse can be claimed as a dependent on someone else’s return, or if your filing status is married filing separately.
It is important to understand that you cannot use the same expense twice to claim different credits or deductions. For example, you cannot claim the tuition and fees deduction and one of the education credits for the same expenses. However, you can take the student loan interest deduction and an education credit (or deduction) during the same tax year if you paid eligible education expenses as well as interest on a qualifying student loan. Speak with an experienced tax preparer if you need help determining the best way to deduct eligible expenses.
Did you or one of your family members attend school in the past year? Which education-related tax deductions are you eligible for?