To say that college is expensive would be a major understatement. According to the College Board, tuition and fees for the 2016–2017 school year cost an average of $33,480 at private colleges, $9,650 at public in-state colleges, and $24,930 at public out-of-state colleges. And you can't help but notice that these numbers don't include room and board, which can easily add $10,000 or more to your yearly total.
There's no question that paying for college is an enormous undertaking, but if you're a student, you should know that there are tax breaks available to ease the burden just a bit. Here are three to look into.
1. The American Opportunity Tax Credit
The American Opportunity Tax Credit is available to students during their first four years of higher education studies. To qualify, you must be enrolled at least half-time and at an eligible institution. If you meet these criteria and don't earn too much, you could shave as much as $2,500 off your taxes.
The credit itself is calculated as 100% of your first $2,000 in qualified education expenses, plus 25% of the next $2,000 in qualified expenses, for a total of $2,500. Qualified expenses include not just tuition and fees but books, supplies, and equipment needed for your studies.
As a reminder, any time you receive a tax credit, that amount is automatically subtracted from the total tax you owe. So if you owe $3,000 in taxes and then apply a $2,500 credit, you'll reduce your tax liability to just $500. Furthermore, because the American Opportunity Tax Credit is partially refundable, if it knocks your tax liability down below $0, you'll get a check for up to 40% of the credit's value, or $1,000.
Now as tends to be the case with tax credits, earning too much money will render you ineligible for the American Opportunity Tax Credit. As a single filer, you can take the credit in full if your modified adjusted gross income (MAGI) is $80,000 or less. You'll get a partial credit with a MAGI between $80,000 and $90,000, but once you top the $90,000 mark, you won't be allowed to claim the credit at all. If you're a joint tax filer, you can claim the full credit if your MAGI is $160,000 or less. Joint filers earning between $160,000 and $180,000 get a partial credit, but those making more than $180,000 lose out on it completely.
2. The Lifetime Learning Credit
If you're not eligible for the American Opportunity Tax Credit, your next best bet is the Lifetime Learning Credit. (Sorry, you can't claim both.) To qualify for the Lifetime Learning Credit, you must be enrolled at an eligible institution for at least one academic period per year, which could be a semester, trimester, quarter, or whatever time period your school operates on. If you qualify, the Lifetime Learning Credit could be worth up to $2,000, and it's calculated as 20% of your first $10,000 in qualified tuition expenses. The credit, however, is completely non-refundable, so the most it can do is reduce your tax liability to $0.
Like the American Opportunity Tax Credit, the Lifetime Learning Credit is subject to income limits. If you're a single tax filer, you can claim the credit in full if your MAGI is $55,000 or less. You'll get a partial credit if your MAGI falls between $55,000 and $65,000, but you won't be eligible once your earnings exceed $65,000. If you're a joint filer, you'll get the full credit with a MAGI of $110,000 or less, a partial credit with a MAGI between $110,000 and $130,000, and no credit at all for earnings above the $130,000 threshold.
3. The tuition and fees deduction
If you don't qualify for either the American Opportunity Tax Credit or the Lifetime Learning Credit, you might still get a tax break in the form of a $4,000 deduction for tuition fees. Unlike a credit, a tax deduction won't reduce your tax liability dollar for dollar. Rather, it will exempt a portion of your income from taxes. So while a $4,000 deduction won't give you $4,000 of direct savings, it'll spare you from paying taxes on $4,000 of income.
In order to be eligible for the deduction, you must have a MAGI of $80,000 or less as a single tax filer or $160,000 or less as a couple filing jointly. As long as your income doesn't exceed these limits, you can claim a tuition and fees deduction even if you don't actually itemize on your tax return.
Financing an education is no easy feat, so it pays to take advantage of whatever tax breaks come your way. A little extra legwork this tax season could put a nice sum of money back in your pocket.
The Motley Fool has a disclosure policy.