Tax Breaks For College Students and Their Parents

Tax Tips

With the college application process winding down for the 2011 fall semester, this is a good time to review some of the tax breaks your children’s higher education might offer you for your 2010 return.

The American Opportunity Credit (this replaced the Hope Credit) - offers a dollar for dollar reduction in your taxes up to $2500. This is the distinction between a credit and a tax deduction which only reduces your taxable income. Further, up to 40% ($1000) is refundable, which simply means you can get money back even if your tax bill for the year is zero. This credit has a phaseout, for married filing joint, the credit decreases from $160,000 modified adjusted gross income (MAGI) to $180,000 MAGI at which point, there is no credit. Consider this for a moment – this has the effect of taking this $160K-$180K income spread and making it an effective 40.5% bracket as $2500/$20000 is 12.5% and this range falls within the 28% normal tax bracket. For the single parent, the phaseout range is from $80,000 to $90,000 MAGI and the decisions regarding deductions or addition to income when in this range are even more sensitive.

The Lifetime Learning Credit – is also a credit, but only applicable to the extent taxes are otherwise owed, i.e. it’s not refundable, and limited to $2000 per year. It has lower phaseouts, $100,000-$120,000 for married, $50,000-$60,000 if single. While the American Opportunity Credit could only be used for the first four years of undergraduate study, the Lifetime Learning Credit can be applied for graduate learning as well as courses to acquire or improve job skills. Want more info? Watch a short video on the Lifetime Learning Credit.

Tuition and Fees – if neither of the above help you, you might be able to take a deduction off your income for tuition and fees. This option offers a $4000 deduction and you do not need to itemize to take advantage of it. Instead you fill out Form 8917 and submit with your 1040. The income limit for this deduction is $160,000 if married, $80,000 if single, but it’s not scaled as the credits are, there are thresholds, and your deduction allowed is $2000 or $4000 maximum, if any. Of course, if the tuition and fee total was lower, that’s the limit of this deduction.

Interest Loan Deduction – As with the tuition/fee deduction, interest on student loans can offset your taxable income without needing to itemize. Up to $2500 of interest may be deducted with a MAGI limit of $150,000 married, $75,000 single.

Important to note, the above are not cumulative, you should review the rules regarding each benefit and take the one most advantageous to you.

To help pay for higher education, you may need to tap your IRA. While early withdrawals are typically subject to a 10% penalty, withdrawals for this purpose are only taxed as income, no penalty. This is to pay for qualified education expenses for you, your spouse, your children or spouse’s children or any of your descendants.

If you or your children were in college in 2010, don’t miss the potential tax savings available to you. Leave of a comment if this article helped you find a deduction you may have not otherwise known about.

Comments (34) Leave your comment

  1. If I buy tuition required books from Amazon can I deduct that on my taxes with the receipt or is it only if the books are bought directly from the school bookstore? I am an undergraduate.

  2. Form 8863, line 7 has a check box. There’s a test, was the earned income less than half of your support? Does the term “support” include tuition? If I made $15k and I paid all my room and board, totaling $10k. But my parent paid for $40k tuition. Is this test ” no”? Basically my earned income = $15k and support = $10k. Or should it be yes as my support = $50k?

  3. I didn’t know about the Form 8863 when I filed my taxes for 2011. Is it possible to file it now for that period?

  4. My son recently graduated with his Bachelor’s and moved back home because of a college internship, then employment, can we, his parents, claim the moving expenses since we paid for the move?

    1. Hi Rebecc,
      Unfortunately you can only claim moving expenses if you’re moving for a new job or your business relocates. You cannot claim moving expenses to move your dependent back home.
      Thank you,
      Lisa Greene-Lewis

  5. Are there any tax breaks for parents when their college students go out of state for college and parents pay for their living expenses (apt, utilities, food, etc.) plus tuition?

  6. Our daughter is a senior and we made several trips to visit colleges this year. The longest trip was to Nashville where we visited Vanderbilt and Belmont on their campus visitation days. This required hotel stay. Are any of the affiliated expenses tax deductible? (mileage, cheap hotel, etc?)

  7. By the way while I am asking. Are there any new tax breaks for people who do not have any children at home. Very little things to claim. Angie from NC.

  8. Hello, I have two student loan in my name for my daughter. She is now out of College and I did not know if i could use the loans for tax reasons. Thank you Angie from NC.

  9. One of the major concerns many parents have is how to pay for college. Some put it off until their children are visiting schools, while others start the moment their child is born. While it’s always best to save early, college savings is one place where being smart about where you save, and how much, can be crucial.

  10. I am married, and my husband and I file separately. Is it possible for one of us to claim education deductions for our daughter or do we have to file jointly?

    Thank you

    1. Hi Karen,
      You cannot file married filing separately and claim the education credits or deduction. You have to file married filing jointly.
      Thank you,
      Lisa Greene-Lewis

  11. My daughter is in college out of state and i pay her rent utilities cable for room and board, can I claim the amounts. Also I moved her there and bought her furniture for school can I claim that also?
    Thank you

    1. Hi Sandra,
      Unfortunately, room and board, utilities, furniture, and her move there are not college expenses eligible for the education deductions and credits.

      It sounds like you may qualify for supplying over half of her support so you may be able to claim her as a dependent.

      Thank you,
      Lisa Greene-Lewis

  12. Hi, I’m a first year college student and I am going in school full time. I was wondering what type of documents do I need to give to my parents so they can present it when they do they’re taxes.

    Thank you!

    1. Hi Melinda,
      If you are talking about documents so that they can claim education expenses, you should give them your 1098-T if you receive one for your college expenses. Your parents also must claim you as a dependent in order to deduct the education expenses.
      Thank you,
      Lisa Greene-Lewis

  13. my son works, pays his own tuition and is not a dependant. he will get all his withholding back. can he get more back for tuition, books, fees etc??

    1. Yes he can, but there are a few stipulations. If he is in the first four years of college he can claim the American Opportunity Credit and deduct his tuition, books, and fees. The tuition will most likely be reported on the 1098-T. If he paid the educational institution for the books and fees directly they will report those items on 1098-T. Even if they don’t report the books on 1098-T he can deduct them. If he is a graduate student he may qualify for the Lifetime Learning Credit, however books must be purchased from an educational institution to be able to deduct them under this credit. He may also qualify for Tuition and Fees deduction. Don’t worry TurboTax will guide you through the entries and choose the best option.
      Thank you,
      Lisa Greene-Lewis

  14. I am divorced and my ex spouse is claiming my son as a deduction. We split college fees 50-50. I will pay approximately 15,000 in tuition and fees. Is this deductible?

    1. Hi Judy,
      College fees are deductible, but not the entire amount. In addition, the person who claims your son as a dependent will get the deduction for his college tuition.
      Thank you,
      Lisa Greene-Lewis

    1. Hi Herb,
      If it is college tuition, you can only claim it if you claim him as a dependent. If your grandson files his own taxes and claims the personal exemption, then he would get the deduction. If his parents claim him as a dependent, they will get the deduction.

      If it is high school tuition, you unfortunately cannot deduct it.

      I hope this helps you!

      Thank you!
      Lisa Lewis

  15. The information was very interesting. But I do have a question concerning a moble home that we bought…they depreciate each year, Can the depreciate be deducted of my taxes even if I don’t own a business?

  16. My son is has a paid internship at a church. They gave him a 1099 for about 7000.00 That is all he made for the year…and owes 700.00 ish? I know all the reasons…ie both sides of SS etc but it just doesn’t seem right. Comments?

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