With a new college school year underway, it’s comforting to know that you could get 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.
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 for the tax year 2018. 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 $66,000 for single filers, and up to $132,000 for married filing jointly for tax year 2018 taxes.
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.
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 tax 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 tax 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.
Tuition and Fees Deductions (Expired After Tax Year 2017)
The Tuition and Fees Deduction allowed you to deduct up to $4,000 but was not extended through the tax year 2017. If you still need to file 2017 taxes, you may be able to take the tax deduction for qualified tuition and related expenses you paid in 2017.
It is a tax deduction, not a tax 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 tax 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 filing 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, 2017. TurboTax will continue to keep you updated on the latest tax laws and although this tax deduction may not be extended for the tax year 2018, the following tax benefits for a college education to help curb costs still exist, including the American Opportunity Credit, Lifetime Learning Credit, 529 plans, Education Savings Accounts, and the Student Loan Interest Deduction.
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 you don’t meet the qualifications to claim them as a dependent 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. If you have questions, you can connect via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. A TurboTax Live CPA or Enrolled Agent can also review, sign, and file your tax return.