Most colleges are back in session, which means millions of students across the U.S. are in the midst of taking out student loans and paying for tuition, fees, textbooks, laptops, printers, and other school-related expenses. Those costs really start to add up. And, although grants, loans, and other forms of aid can help you maintain financial stability while you’re in school, college students and their parents shouldn’t miss out on potential savings through college tax deductions and tax credits.
Publication 970 from the IRS lists all the ways independent students and parents with college-aged dependents can save money on their tax bills with education-related expenses.
According to CollegeBoard.org, students and their parents saved about $17.9 billion on their federal income taxes through tax credits and deductions for education expenses in 2013 (the last year data was available).Americans save about $17.9 billion on income taxes through tax credits and deductions each year.Click To Tweet
College Tax Deductions and Tax Credits for Students
Before getting into the nitty-gritty details of your potential tax benefits, keep in mind that the IRS has a new requirement for 2016. “For 2016, the American opportunity credit, lifetime learning credit, and tuition and fees deduction will not be allowed unless the student receives a Form 1098-T from an eligible educational institution.”
It’s also worth noting that educational credits are only available to: 1) students who file independently on their tax returns and pay for their educational expenses, 2) parents who pay for their dependent’s educational expenses, 3) spouses of students who file taxes jointly, 4) legal U.S. citizens and residents. You must also be enrolled in an
You must also be enrolled in an eligible educational institution to qualify for the tax credits and deductions.
Tuition and Fees College Tax Deduction
Did you know you can deduct up to $4,000 of your taxable income each year? The IRS limits the tuition and fees college tax deduction to single taxpayers whose modified adjusted gross income (MAGI) is less than $80,000 or married (filing jointly only) taxpayers whose MAGI is less than $160,000 per year.
This deduction is available to all levels of postsecondary students enrolled in at least one course. It is available to even those in graduate and postgraduate programs at eligible institutions or students at vocational schools.
The student or spouse must pay for the tuition and fees to qualify for the deduction. And, you must fill out Form 8917 for the year you paid the tuition (e.g., tuition for the spring semester of 2017 that was paid in December 2016 would figure into your 2016 tax filings).
Additional school expenses may qualify for this deduction, according to the IRS. “Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.”
American Opportunity Tax Credit
The IRS not only offers tax deductions. It also has tax credits to help students and their families manage educational expenses. The American Tax Relief Act of 2012 extended the American Opportunity Tax Credit (AOTC) through the end of 2017. Eligible students this year and next year will be able to deduct up to $2,500 annually for tuition, fees (some exclusions may apply), and course-related books.
The American Opportunity Tax Credit is only available for students who are in their first four years of postsecondary education and pursuing degrees or credentials. And, they can’t have any felony or drug convictions on a student’s record. Students must also be enrolled at least part-time at their eligible institution.
On the bright side, parents with multiple dependents in college could qualify for up to $2,500 per student. If you’re eligible for the American Opportunity Tax Credit and have a minimal tax burden before accounting for the credit, you may even qualify for a refundable credit.
You could receive a refund of up to $1,000 (limited to instances where 40% of the tax credit you qualify for is more than the money you owe on taxes) even if you don’t owe money on taxes for a given year.
The IRS adds that there are a few exclusions for the American Opportunity Tax Credit:
- Room and board
- Medical expenses
- Student fees unless required as a condition of enrollment or attendance
- Same expenses paid with tax-free educational assistance
- Same expenses used for any other tax deduction, credit or educational benefit
Although living expenses do not apply to the American Opportunity Tax Credit, you can still use student loans to cover living expenses in some instances.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is slightly different from the American Opportunity Tax Credit. It’s maximum benefit is $2,000 per filing (not on a per-student basis). It’s nonrefundable. And, the IRS sets the MAGI limits to $130,000 for married (filing jointly) couples and $65,000 for single taxpayers (or head of household).
Although the Lifetime Learning Credit seems more restricted, it applies to all years of postsecondary education (not just the first 4 years) and courses that contribute to job-related skills or knowledge.
The Lifetime Learning Credit also does not require that students pursue a degree or credential in order to be eligible for the credit. They also do not have a minimum course enrollment requirement. Just like the American Opportunity Tax Credit, Lifetime Learning Credit filers will need to fill out Form 8863 to qualify.
Student Loan Interest
If you’ve paid off some of your student loans, you could be eligible for a student loan interest deduction. Married couples with a MAGI of less than $160,000 per year or single filers with a MAGI of less than $80,000 per year could qualify for a deduction of up to $2,500 based on personal interest payments made on student loans.
The one-time loan origination fee also qualifies for this deduction, along with capitalized interest, interest on refinanced student loans, and voluntary loan payments. Be sure to consider refinance student loan programs if you’re struggling with your student loans.
Voluntary payments refer to student loan payments made during the deferral period, such as when the student is still in school. It’s a great way to erase student loan debt more quickly, and the IRS rewards students for doing so with this tax deduction.
As you can see, there are multiple ways to reduce your tax burden next year with educational tax credits and college tax deductions, but no double benefits allowed. Whether you do your own taxes, or file with a company or certified accountant, it’s important to keep track of your school-related expenses for next year’s tax filing time.
If you’re not sure what you might qualify for, check out this survey from the IRS to determine your eligibility for an educational tax credit.
Have you had success with college tax deductions and tax credits? Which college tax deductions have been the most beneficial for you and your family?