Despite the fact that tens of millions of Americans are still struggling to make ends meet in our slowly rebounding economy, the cost of college keeps rising higher. Even parents in reasonably secure financial circumstances need all the help they can get with college expenses.
Fortunately, one institution is offering some relief from high tuition: the IRS.
Most students qualify for one or more of the tax breaks available for educational expenses, and if you’re a parent who pays those expenses for a dependent child, you can use those breaks on your tax return. Let’s take a closer look at some of them.
College students or their parents have two tax credits they may be able to claim to offset part of their expenses. The American Opportunity Tax Credit, which was formerly known as the Hope Credit, provides a 100% tax credit for the first $2,000 you spend on college, with an additional 25% credit on the next $2,000. That makes the maximum credit of $2,500 per student. But the credit is only available for the first four years of college, making it unavailable for most graduate students, and you have to be in school at least half-time. Moreover, it starts to phase out for single taxpayers making more than $80,000 or joint filers with incomes over $160,000.
For those who aren’t eligible for the American Opportunity Credit, the Lifetime Learning Credit offers a scaled-down tax break for students and parents. The Lifetime Learning Credit pays back 20% of tuition and fees up to $10,000, making the maximum credit $2,000 per student. Even though the percentage of the credit is less, the terms are much less restrictive, with the credit available for an unlimited number of years and regardless of how many courses you take. But the income limit is lower: The credit starts to phase out above $52,000 for singles or $104,000 for joint filers. Moreover, you can’t use the credit for expenses for course materials that you don’t get directly from your college.
Unfortunately, you can’t take both the American Opportunity Credit and the Lifetime Learning Credit in the same year for the same student. So if you’re eligible for both, choose whichever one will give you greater benefits. In general, the American Opportunity Credit provides a bigger benefit if it’s available, but it’s still worth running the numbers.
Deducing Tax Deductions
The other type of tax benefit that comes into play are deductions for tuition and fees. Under the tuition and fees deduction, you’re allowed to reduce your income by up to $4,000 in college expenses, depending on your income.
Tax deductions aren’t as valuable as credits because credits reduce your tax liability dollar for dollar, whereas a deduction only reduces the income on which your tax is calculated. So for instance, if you’re in the 25% tax bracket, a $100 credit will give you $100 in tax savings, but a $100 deduction will only save you $25.
Nevertheless, some people will do better by taking the tuition and fees deduction. For one thing, it has a higher income threshold than the Lifetime Learning Credit, which makes it available to more taxpayers. Like the Lifetime Learning Credit, though, it’s available for expenses beyond the undergraduate level.
Again, though, you have to pick whether to take the tuition and fees deduction or one of the two education credits. You’re not allowed to double-dip.
If you’re worried about not being able to take the tuition and fees deduction because you don’t itemize deductions, don’t sweat it. You don’t have to itemize to take this deduction, and taking it won’t have an impact on your ability to itemize or take a standard deduction.
Get the Whole Scoop
The ins and outs of every education tax break are far too complicated to discuss in every detail here. Different rules apply for what qualifies as eligible educational expenses, and you also need to understand how financial aid can have an impact on credits and deductions.
Fortunately, the IRS makes it easy to get more information. Just click here and see everything the IRS has to say on the subject. It could be the best education you’ve ever gotten — and the payoff is worth the effort.
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