College is expensive. With student loans rivaling mortgages, it’s easy to see why it’s a big subject of discussion. Tuition, fees, books, housing, food, and the costs of attending universities are on the rise. My own alma mater, Carnegie Mellon University, was “only” $30,000 when I enrolled in 1998, a pricey sum even back then (generous grants and student loans helped a lot). Today, it costs over $60,000 a year!
If you are looking for a way to offset some of your education costs, the government offers some tax credits designed to help students and their parents. While these tax breaks won’t completely cover the cost of college, they can reduce some of the pain involved.
American Opportunity Tax Credit
The American Opportunity Tax Credit is offered to students who pay qualified tuition (and aren’t claimed as dependents elsewhere), as well as to parents who pay expenses for their dependent students or themselves. Replacing the Hope Credit, the American Opportunity Credit offers some modified rules, which make it available to more students. Normally, the Hope Credit only allowed you to use it on the first two years of post-secondary education, and the modification allows for the first four years, as well as raising the income limits, and expanding qualified expenses.
This tax credit allows you to claim up to $2,500 per student. The full credit is available for individuals with a MAGI(Modified Adjusted Gross Income) of $80,000 or less, $160,000 for married filing jointly. It is 40% refundable, meaning that you can get up to $1,000 back even if you don’t owe taxes.
Lifetime Learning Credit
Rather than limiting your ability to get tax credits for education expenses for the first four years of college, it’s possible to use the Lifetime Learning Credit to offset your expenses even in graduate or professional school. As long as the educational institution is qualified, undergraduate or beyond, you can qualify for a credit of up to $2,000 per return for your expenses. It’s figured on 20% of your tuition and fees, up to the first $10,000. There is a phase out as you reach certain income levels. Parents can claim the credit for dependent students.
Limitations to These Tax Breaks
Realize that there are limitations to the tax breaks you can take. You can’t claim the American Opportunity and Lifetime Learning credits for the same student in the same year. If you are a parent with multiple dependent students, you can spread these credits around a little bit to maximize your return.
Don’t worry about knowing which credit you qualify for, TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers.