Now that we are in the midst of tax filing season, it is a great time for families and college students to re-familiarize themselves on the available tax benefits that could potentially lower higher education costs.
According to research by Sallie Mae, the average family with higher education costs spends more than $24,000 a year on college. However, only one-third of these same families take advantage of federal tax credits and deductions that can help make college more affordable.
The availability of these tax benefits are based on a number of criteria and have varying rules and limitations. Understanding and deciding what is best for your situation can be tricky and take time, but is often well worth it. Hiring a CPA can be useful to help you navigate the process. Now let’s look at the details.
American Opportunity Tax Credit
Families can receive a credit of up to $2,500/year per student for up to four years. This is particularly beneficial if you have more than one student in college at the same time. It is also partially refundable, allowing you to receive up to $1,000 even if you owe no taxes.
The credit is limited by a taxpayer’s adjusted gross income. It starts to phase out at $80,000 and $160,000 for single and married filers, respectively, and is completely unavailable once AGI reaches $90,000 and $180,000.
Lifetime Learning Credit
This credit offers up to $2,000 a year, per taxpayer return. Note that this credit is not per student, but per taxpayer. Any post-high school education qualifies and there is no limit on how long it can be claimed. Also, unlike the American Opportunity Credit, this one is not refundable.
This credit is also subject to AGI limits. The lifetime learning credit starts to phase out at $55,000 for single filers and $110,000 for joint filers and becomes completely unavailable at $65,000 and $130,000, respectively.
Tuition and Fees Deduction
Even if you don’t qualify for one of the above credits, you may still be able to deduct qualified tuition and fees. The tuition and fees deduction is available even if you do not itemize your deductions.
Single filers with an AGI of $65,000 or less can deduct up to $4,000 and up to $2,000 for those between $65,000 and $80,000. Married taxpayers filing jointly are eligible for the $4,000 deduction if their AGI is less than $130,000 and they can get the $2,000 deduction with an AGI between $130,000 and $160,000. Once a taxpayer exceeds these income thresholds, no deduction is available.
The Fine Print
There are a number of nuisances to remember as you navigate the available credits and deductions. For example, if a student qualifies for more than one of the above you can only take a credit or the deduction, but not both. You can mix and match, however. If a family has more than one student, you can claim different credits for different children.
One of the more common approaches to maximize these credits is to claim the American Opportunity Tax Credit for four years when a student is an undergraduate and then switch to the Lifetime Learning Credit for graduate school.
Student Loan Interest Deduction
If you have student loans, the interest you pay may also be deductible. You do not need to itemize to receive the student loan interest deduction. The deduction offers up to $2,500 off of your taxable income for single filers making up to $80,000 and married taxpayers up to $160,000. The deduction is available to the taxpayer obligated to repay the loan. In other words, a student who is not claimed as a dependent on another taxpayer’s return may claim the deduction, even if the parent is the one repaying the loan.