In many parts of the country, autumn means a drop in temperatures and leaves turning color. But no matter where you live, it also means heading back to school. For college students and those who love them, that means tuition payments and other fees. The good news is that there are a variety of ways to handle these expenses in a tax-savvy manner.
Tax credits reduce tax liability dollar-for-dollar, so let’s start here.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC), which was extended through December 2017 by the American Taxpayer Relief Act of 2012, can be worth up to $2,500 per eligible student. However, it is only available for the first four years of post-secondary education and applies to qualified expenses such as tuition and fees, course-related books, supplies, and qualified equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income (MAGI) falls below $80,000 for singles or $160,000 for married couples filing jointly.
Lifetime Learning Credit
Another tax break to look into is the Lifetime Learning Credit. It can be applied to any and all years of higher education, though it can’t be used concurrently with the American Opportunity credit. In 2015, a taxpayer may be able to claim a Lifetime Learning Credit for up to $2,000 for qualified expenses paid for a student enrolled in an eligible educational institution. The same $80,000/$160,000 MAGI limit applies.
Deduce your deductions
- Tuition and fees: Tax deductions are also available for some college-related expenses. For example, eligible taxpayers can currently write off up to $4,000 in tuition and fees. Generally, this deduction can only be claimed by those who make qualified higher education expenses for an eligible student below the $80,000/$160,000 MAGI limit mentioned above.
- Student loan interest: Taxpayers with MAGI of less than $75,000 as single filers or $155,000 as married joint filers may be able to deduct interest paid on a student loan used for higher education during the coming year. The student loan deduction can reduce the amount of income subject to tax by up to $2,500 — even for those who don’t itemize.
Bear in mind that you can’t claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity credit or the Lifetime Learning credit. Taxpayers must take the credit or the deduction based on which is more beneficial.
What expenses qualify
Qualified expenses for the two credit options or tuition deduction are amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution. For the AOTC only, you may also claim the cost of books, supplies, and equipment as qualified expenses. For the student loan interest deduction, the loan is allowed to cover all of the above as well as room and board and other necessary expenses like transportation. Be careful though; room and board is only allowed for the student loan interest deduction.
The tax breaks mentioned here may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Ask your tax advisor about what best fits your specific situation.