Paying for college is expensive and finding ways to stretch your dollars can be difficult. Thankfully there are a few tax credits that can help you reduce your tax bill and the financial burden of higher education.
Credits
By far the most popular education credit is the American Opportunity Tax Credit (AOTC). This credit gives you the biggest benefit as long as you’re eligible. You can get an annual credit of $2,500 per eligible student for qualified education expenses. If your tax liability is low, or if you don’t have a tax liability, the IRS will refund 40% of the credit to you. That is an extra $1,000 in your account! How do you know if you’re eligible? You or your dependent must currently be pursuing a degree and be enrolled at least part-time. You can only take the credit for four years, so if you take longer to complete your degree you won’t be eligible. But that’s okay; there may be other credits you can qualify for. I’ll get to that next. Also your income needs to be $80,000 or less if you’re filing single or under $160,000 if married filing jointly, before phaseouts begin.
So, you’re taking a little longer to complete your degree. No problem! You may qualify for the Lifetime Learning Credit (LLC). This credit is worth $2,000 and is for qualified educational expenses. Unlike the AOTC that has a four year max, there is no limit on how many years you can use this credit. All you or your dependent need to be eligible is to be enrolled at an approved college or university and be enrolled for at least one semester. With this credit there are income limitations. Your income needs to be $66,000 or less if filing single or $132,000 if you are married filing jointly.
Deductions
Unlike a credit, like the AOTC and LLC, which reduce your tax liability dollar for dollar, there is also a tuition and fees deduction. This allows you to reduce your taxable income up to $4,000. The expenses you deduct must be related to higher education costs and cannot be for living expenses, like room and board.
You made it and finally graduate with your degree. Congrats! Now it’s time to pay on those student loans. The IRS will allow you to deduct up to $2,500 of interest paid for the year. How do you know how much interest you have paid? The payor, like U.S. Dept. of Education, will mail you a 1098-E with the amount of interest you have paid for the year. There is an income limitation but as longer as you have made less than $80,000 if single and $160,000 if married filing jointly, you’re good to take this deduction.
Not sure which is the best you for?
If you have education expenses and not sure which is the most beneficial for your tax situation, see the IRS website: https://www.irs.gov/credits-deductions/individuals/education-credits-questions-and-answers. They have a nice Q&A section that can answer some of your questions. Still needing guidance? Let us know!
