With a new college school year beginning, it’s comforting to know that you’ll be getting some help from Uncle Sam in dealing with the blizzard of college related expenses that are hitting. The IRS provides a number of education tax credits and tax deductions that will take some of the sting out of college expenses, even before the school year starts.
The American Opportunity Tax Credit
The American Opportunity Tax Credit enables students (or parents) to claim up to $2,500 per year for the first four years of post-secondary education. This is a tax credit against your income tax liability, which means it serves to reduce the amount of tax you owe. Further, 40% of the credit is “refundable”, which means that you can claim the tax credit even if it exceeds your actual tax liability. That means that you can still get up to $1,000 of the credit back, even if you have no tax liability.
The credit is available only to students (or their paying parents) who have not yet completed the first four years of post-secondary education. That means that it doesn’t apply to expenses related to school attendance after you have attained a four year degree. The tax credit can be claimed for each student for only four years per eligible student.
The student must be participating in a program that will lead to a degree or some “other recognized educational credential” and it applies to payment of tuition and fees, required enrollment fees, course related books, supplies and equipment.
It is also income based. It can be claimed only by couples (married filing jointly only) who earn no more than $180,000, or by single filers who earn no more than $90,000 per year. Students must be enrolled at least “half-time” for at least one academic semester during the calendar year.
The Lifetime Learning Credit
If your child does not qualify for the American Opportunity Credit, you or your student you may still be eligible for the Lifetime Learning Credit. It enables students and their families to claim the credit for up to $2,000 in education related expenses per return filed. Like the American Opportunity Credit, it is also income based. It can be claimed for modified adjusted incomes up to $65,000 for single filers, and up to $131,000 for married filing jointly.
Unlike the American Opportunity Credit, there is no limit on the number of years you can claim the credit, which makes it perfect for students who have already completed a four year degree program. And though you can’t claim both the American Opportunity Credit and the Lifetime Learning Credit on the same student, you can claim the American Opportunity Credit for one student, and the Lifetime Learning Credit for another in the same year.
What’s more, you can claim the Lifetime Learning Credit even if the student is not pursuing a program that will lead to a degree or some other recognized educational credential.
The tax credit applies to tuition and fees required for enrollment or attendance, amounts paid for course-related books, supplies, and equipment. You can even claim the credit for eligible expenses paid for with loan proceeds.
Tuition and Fees Deductions
The Tuition and Fees Deduction allows you to deduct up to $4,000 per year. This deduction was extended through 2016 and can be used for qualified tuition and related expenses you paid for in 2016 if you still need to file 2016 taxes. It is a tax deduction, not a credit against your income tax liability, which means that it can be used to reduce your income before calculating your actual income tax.
It is also income based, and as such it is deductible if you earn less than $80,000 per year as a single filer, or less than $160,000 as married filing jointly. You cannot claim the tax deduction if you are married and file separately.
You can include amounts paid for tuition and required fees, for you, your spouse or your dependent child. The student must be enrolled at an eligible post-secondary educational institution. Not included however are expenses paid in connection with room and board or for personal expenses. The deduction can be claimed even if the expenses were paid for with borrowed funds.
At this time the Tuition and Fees Deduction has not been extended past December 31, 2016. We will continue to keep you updated on the latest tax laws.
Student Loan Interest Deduction
You can deduct eligible student loan interest paid as a Student Loan Interest Deduction. This tax deduction allows you to deduct up to $2,500 in interest paid on a federal or private student loan. Even better, you can take it as an “above-the-line” deduction, which means it will reduce your income. This means that you can claim the deduction even if you don’t itemize your deductions.
It is also income based, meaning that your modified adjusted gross income (MAGI) cannot exceed $160,000 if you are married filing jointly, or $80,000 and filing as single, head of household, or a qualifying widow(er).
This deduction is available to a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
There are some important considerations with these education tax credits and deductions: You can only claim one of these tax benefits per student per year, with the exception of the Student Loan Interest Deduction. Also, parents can only claim education credits and deductions if they claim their child as a dependent. If your child files their own tax return and claims a personal exemption then they get to claim the education tax credit or deduction.
Don’t worry about knowing what educational benefit you qualify for. TurboTax will ask you simple questions and give you the education credit or deduction you are eligible for based on your answers.