Paying for a college education is a challenge for many Americans, but lucrative tax breaks can offset at least some of the high costs of tuition and related expenses. Several different provisions give students and parents some relief on their taxes, with the potential to cut thousands of dollars off your final tax bill. Below, you'll learn about three of the most of common tax breaks for those in school.
The American Opportunity Tax Credit
The American Opportunity Tax Credit is available to those who are in the first four years of their college education. The provision offers a dollar-for-dollar credit for the first $2,000 of qualifying educational expenses, plus an additional credit of 25% of the next $2,000 in expenses. The maximum credit amount for any given year is $2,500. The credit is available for taxpayers making up to $90,000 if single or $180,000 if filing jointly, with reduced amounts applying for those making more than $80,000 or $160,000, respectively.
Eligible expenses include tuition and required fees in order to enroll and attend college. Unlike some other education credits, expenses for course materials like books, supplies, and equipment are also eligible for the American Opportunity Tax Credit.
The best aspect of the American Opportunity Tax Credit is that 40% of the credit amount is nonrefundable. That means that taxpayers can get up to $1,000 back from the IRS even if they don't owe any taxes at all during that year.
The Lifetime Learning Credit
For those who aren't eligible for the American Opportunity Tax Credit, the Lifetime Learning Credit can be a valuable alternative. This credit has no limits on how long you've been in school, and there's a wider range of coursework that qualifies, including graduate and professional degree courses and training for job skills improvement. The credit is calculated by taking 20% of the first $10,000 in eligible educational expenses, making the maximum credit $2,000. Lower income limits of $65,000 for singles and $130,000 for joint filers apply, with similar reductions applying to those making more than $55,000 or $110,000, respectively. Eligible expenses are limited to tuition and required fees.
Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is nonrefundable. Therefore, you need to have tax liability in order for it to be valuable for you.
Tuition and fees deduction
Finally, those who aren't eligible for the two credits above can sometimes get a benefit from the tuition and fees deduction. This provision allows you to deduct up to $4,000 from your taxable income for amounts paid for tuition and required fees. Note that this is a deduction rather than a credit, so the actual tax savings is considerably less than $4,000 and depends on your tax bracket. However, tax savings of $200 to $1,000 are available for those who qualify.
To calculate the deduction, a maximum of $4,000 applies if you earn less than $65,000 for singles or $130,000 for joint filers. A smaller deduction maximum of $2,000 applies for those making up to $80,000 for singles or $160,000 for joint filers. Above those limits, no deduction is available.
Keep in mind that you typically can't double-dip for these tax breaks. Instead, you'll need to choose whichever provision is most favorable to you. In general, though, the two credit provisions will be most favorable if they're available, with the tuition and fees deduction being a consolation prize if you can take neither of the two credits.
Students and their parents often need these valuable tax breaks in order to make the economics of going to college work. Be sure to understand whether you'll qualify, and then you'll be able to make a smart choice about your college education.