Tax Considerations for College Students

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Fall is here; and with the cooler weather comes college classes, tax credits, and other tax considerations. What? Why should you think about your taxes during the back-to-school rush?

American Opportunity Credit

Well, the government has a nice back-to-school program for parents and college students. It’s called the American Opportunity Credit and it benefits full-time and part-time college students who will be enrolled in classes this fall.

The American Opportunity Credit falls under the umbrella of the American Recovery and Reinvestment Act (ARRA) and offers a maximum tax credit of $2500 per student. Through the ARRA, more parents and students will qualify for the updated tax credit, which aims to help a greater number of families with yearly college expenses.

The American Opportunity Credit modifies the Hope Credit by allowing the tax credit to be available to a larger group of applicants. The primary modification is the change to qualifying household income levels. The full amount of the credit ($2500 per student) is available to individuals whose modified adjusted gross income is $90,000 or less; or $180,000 or less for married couples filing a joint return.

This tax credit is phased out for households with incomes higher than these levels.

The American Opportunity Credit offers a higher tax credit limit than the former Hope Credit or the Lifetime Learning Credit. According to the IRS, “It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for the first four years of college instead of two.”

Lifetime Learning Credit

Another perk available to you if you paid qualified college expenses is the Lifetime Learning Credit.  The credit is up to $2,000 per tax return and may be available if your modified adjusted gross income is $61,000 or less ($122,000 if you are married filing jointly).  The advantage of the Lifetime Learning Credit is there is no limit on the number of years that the deduction can be claimed for each student, so being a professional student may pay off.  The credit is available even if you are taking one class, not pursuing a degree, or you are a graduate student.

529 Savings Plans

Tax-free college savings plans and prepaid college tuition programs can be used for a wide assortment of eligible higher-education expenses such as computer equipment, classroom materials, books, educational supplies, dorm fees, and tuition.

529 plans are tuition programs that have been qualified and authorized under section 529 of the Internal Revenue Code. Especially in recent years, they have become a wise and popular way for families to save for a child’s college education. Though contributions to 529 plans are not tax deductible, the perks are that there is no income limit for the contributors, your investments grow tax deferred, and distributions for qualified college expenses are tax- free.

529 plan distributions (money taken out of the account to pay for college-related expenses) are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. It is best to check with your 529 plan account manager and with the IRS to make absolutely sure your expense is qualified.

Authorized expenses can be tuition, required fees, books, supplies, equipment and special needs services. Room and board also qualify if the 529 plan beneficiary is at least an official half-time student.

Additions made to this list because of modifications made by the ARRA are “expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American Opportunity Credit, the Lifetime Learning Credit, or the Tuition and Fee Deduction.”

In short, you can use 529 plan distributions for a laptop and computer software requirements, but not an Xbox 360 or the latest DVD.

If your child is already in college, then it’s not going to do much good to start a new 529 plan. However, even if you have a child in high school, you still have time to contribute to a 529 plan and reap some of the benefits.

Tuition and Fees Deduction

If you do not qualify for the American Opportunity Credit and the Lifetime Learning Credit you may qualify for the Tuition and Fees Deduction if your modified adjusted gross income is $80,000 or less ($160,000 if married filing jointly). The Tuition and Fees Deduction is another education tax benefit available to taxpayers who pay for higher education.  The tax deduction was set to expire in 2009, but is now still available through 2011.

This deduction can directly reduce your taxable income by up to $4,000. Basically, this means you are able to claim this deduction even if you don’t itemize deductions on Schedule A (Form 1040).  Some of the other benefits of the tax deduction are it reduces your AGI, which may qualify you for other tax deductions and credits, there is no limit on the number of years the deduction can be taken, and it doesn’t matter how many college courses you have taken at once.

And don’t forget to keep track of the interest you’ve paid on your student loans; it’s tax deductible too. Thankfully, your student loan lender usually sends you a form prior to tax season that clearly states exactly how much interest you’ve paid.

Filing Taxes

April is still 7 months away, but that doesn’t mean you can’t start organizing pertinent tax information. It’s never too early to say, “Make sure you file your taxes.” It’s important to get a jump on things because there are so many deduction and tax considerations when dealing with college expenses.

It would be good idea to keep an ongoing record of your income, possible deductions, and available tax credits. You’ll never know just how many credits and other tax benefits you qualify for as a college student or parent of a college student if you don’t take the time to find out for yourself.

23 responses to “Tax Considerations for College Students”

  1. I filed taxes already and I forgot to include a tuition I paid for Spring Semester 2015 but I paid it December 2014. Can I includeit on my 2015 tax whenI file?

    • Hi Kae,
      You would have to amend your 2014 taxes, if it has been accepted and approved by the IRS. If it is rejected you can fix your return and add your tuition paid.
      Thank you,
      Lisa Greene-Lewis

  2. Co-habitating for 19 years. Both 60 years of age. Contemplating marriage now that it’s legal. Each of our AGIs is around 100K No kids, have mortgage. Each have home office. One business credit or two?

    • Hi Susan,
      Even if you are legally married, your home office deduction will be related to each of your separate businesses. If you are legally married you will file one tax return, but you will each have a Schedule C for each of your businesses that have the home office deduction, which is filed with one federal tax return.
      Thank you,
      Lisa Greene-Lewis

  3. We have two daughters both full time students who live away from home & are self supporting, we have been told by our tax person that we have to claim them until they’re 24. We would rather not claim them & allow them possible access to better financial aid. We realize this will cost us more but we think it would be more beneficial to them. Is this true, do we have no choice?

  4. My son has been out of college for about 10 years but we are still paying back college loans which my husband co-signed for. Can we get deduction for interest paid or the $2500 credit we used to take. Last year I was notified that I could not take it and don’t understand why.

    • My son has been out of college for about 10 years but we are still paying back college loans which my husband co-signed for. Can we get deduction for interest paid or the $2500 credit we used to take. Last year I was notified that I could not take it and don’t understand why.

  5. Hi, I took classes in two colleges last year. I attended school for 10 months. How do I claim to be be full time student? I need to know so as to be able to claim my daughter’s preschool fee.

  6. This is a question i have not comment. I am a full time student that does not work. Do I still qualify for either or all of the above student tax credits? I really need to find out. And if I do qualify what forms do I need when filing my taxes?

  7. I am taking classes to become a teacher, through an Alternative Certification program. Can I take a tax credit? if so, which program.

  8. I am a junior in college and I have worked every year that I’ve been in school, except for my freshman year; yet whenever I file my taxes, I never receive the American Opportunity Credit, nor do I receive any other education deductions.
    Most of my friends who are also students seem to get it every year and one even laughed about how the government was “robbing” me.
    I do get financial aid, but so do my friends, and aside from the money the school gives me, I’ve basically been supporting myself all year.
    So my question to you is, why don’t I receive this credit. It seems as though I’m eligible, but Turbo tax won’t give it to me. And if it turns out I have been eligible all this time, can I amend my old returns to get the credit? Thanks!

  9. I am a junior in college and I have worked every year that I have been in school, except for my freshman year.
    I never receive the American Opportunity Credit, or any other education credit or deduction, while practically all of my other friends who are students receive it. I’ve prepared my taxes and gone to a professional, but I still don’t receive it.
    My question is why don’t I receive this tax credit, and if it turns out I am eligible, can I amend my previous returns? I hope this made sense and you can answer my question.

  10. I forgot to ask, what do I do with my 1098T? Is that just my record of what my school sent to the IRS? Or is that something I file?


  11. I was in school ALL of last year (I’m not going to a traditional school where I get the summer off, I’m at a trade school where I go to school through the whole year) and I didn’t work so I earned ZERO income. I know I don’t have to file taxes if I didn’t earn any income, but I qualify for the American Opportunity Credit and the Lifetime Learning Credit… In order to get the credit, do I have to file my taxes?

  12. I am starting grad school in the Spring, but I still work full time. Does the credit apply for graduate level classes ad well as undergrad?


  13. My son will enter college Fall 2012. I don’t claim him on my taxes but will pay half of his tuition. Am I eligible for the education credit for my portion of the tuition on my taxes even though I don’t claim him?

    • Hi Doshia,
      Unfortunately you can only take the deduction for education if you claim him as a dependent. If he files a tax return and is not claimed as a dependent by someone else he can take the deduction for his college expenses even if you paid them.
      Thank you,
      Lisa Greene-Lewis

  14. I want to get into tax return preparation what tax software is required. This would be for individuals and small businesses

  15. I have a son who completed his internship for 8 months as part of the school program ,can I use American Opportunity credit, Lifetime Learning credit and Tuition fee and deductions at the same time and maximize them?

    • Hi Manuel,
      No you can only use one credit or deduction at a time for the same eligible expenses.
      Thank you,
      Lisa Greene-Lewis

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