College these days is incredibly expensive but many people are not aware of all of the ways that they could save money on higher education. You are probably familiar with scholarships and financial aid but did you know that there are also tax breaks and college tax credits that could help offset college bills?
Tax Credits
A tax credit is an amount of money that a taxpayer can subtract from the taxes that they owe the government. There are many different types of tax credits. For instance some credits promote clean energy by rewarding a tax credit to someone who replaces old appliances around their residence with energy efficient ones. Other tax credits may be given to people who are lower income.
Educational Tax Credits
There are a few tax credits related to higher education, which is also known as college, university, or post-secondary education. If you, your spouse, or your dependent is currently a student or has just completed a degree then there are two student tax credits that you may be able to qualify for: the American opportunity tax credit and the lifetime learning credit.
These tax breaks could end up giving you back some of the money that you spent on college for yourself, your partner, or your dependent, as long as your expenses count as a “qualified education expense.”
The below costs count as qualified education expenses:
- Tuition costs at a qualifying institute of education
- Textbooks, supplies, and other equipment needed for college courses. You do not necessarily have to purchase these from the school for the costs to qualify for a tax credit
- Student activity fees (it they are mandated by the school and are paid directly to it)
American Opportunity Tax Credit
If you apply for the American opportunity tax credit (AOTC) then you may be able to get a tax reduction of $2500 each year for up to four years of college. These tax reductions could add up to a grand total of $10,000, that’s a great amount of money in tax savings! Here’s how the numbers add up:
If you qualify for the American opportunity tax credit then you could get a 100% tax reduction for the first $2000 that you spend on higher education for yourself, your spouse, or your dependent. After the initial $2000, you can qualify for a 25% tax reduction off the next $2000 that you spend that year, which comes out to $500 in savings. So, if you spend at least $4000 on qualified education expenses for post-secondary education then you may be qualified for a $2,500 tax credit for that year’s taxes.
Aside from having to meet the requirements of qualified education expenses, there are a few other caveats to qualifying for the American opportunity tax credit. People with high modified adjusted gross incomes (MAGI) may not qualify for the full credit.
Income Requirements for the AOTC
Here are the specifics on how income affects the American opportunity tax credit for people who are paying for college for themselves, their spouse, or a dependent.
If your MAGI is $80,000 or less and your tax status is single: You will probably be able to claim the full $2500 amount of the AOTC.
If your MAGI is $160,000 or less and you are married and filing taxes jointly with your partner: You will probably be able to claim the full $2500 amount of the AOTC.
If your MAGI is more than $80,000 but less than $90,000 and your filing status is single: You will likely qualify to claim a reduced AOTC.
If your MAGI is more than $160,000 but less than $180,000 and you are filing joint taxes with your spouse: You will likely qualify to claim a reduced AOTC.
If your MAGI is more than $90,000 and you have single filing status: You cannot claim any of the AOTC.
If your MAGI is more than $180,000 and are filing jointly with your partner: You cannot claim any of the AOTC.
To qualify for the American opportunity credit you will also need to fill out the aotc form, also known as form 8863.
Lifetime Learning Credit
If you, your spouse, or your dependent has already completed four years of post-secondary education and would like to continue going to school to pursue an even higher degree or learn a trade then you may qualify for the lifetime learning credit.
With the lifetime learning credit, you can claim 20% of up to $10,000 qualified education expenses paid on one tax return per year. That means that you can save up to $2,000 in tax reductions for every year that you or the student in your life continues their education. As long as that student qualifies for the credit each year, there is no limit on the amount of years that you can claim the lifetime learning credit. For instance, if you qualify to claim the full credit for 4 years of schooling, your savings come to a grand total of $8,000 in tax credits.
Income Requirements For The Lifetime Learning Credit
The income requirements for the lifetime learning credit are a bit more stringent than the qualifications of the AOTC.
If your MAGI is $58,000 or less and your tax status is single: You will probably be able to claim the full lifetime learning credit.
If your MAGI is $116,000 or less and you are married and filing taxes jointly with your partner: You will probably be able to claim the full lifetime learning credit.
If your MAGI is more than $58,000 but less than $68,000 and your filing status is single: You will likely qualify to claim a partial lifetime learning credit.
If your MAGI is more than $116,000 but less than $136,000 and you are filing joint taxes with your spouse: You will likely qualify to claim a partial lifetime learning credit.
If your MAGI is more than $68,000 and you have single filing status: You cannot claim any of the lifetime learning credit.
If your MAGI is more than $136,000 and are filing jointly with your partner: You cannot claim any of the lifetime learning credit.
Tax Deductions For Education
There are also college tuition tax deductions that you may qualify for. For instance, if you are paying off private or federal school loans then it is possible that you could meet the requirements for the student loan interest deduction.
The student loan interest deduction lowers the amount of your earned income that is subject to taxation. If you are the person who is legally obligated to pay a school loan and that loan was borrowed to pay for qualified educational expenses then you may be able to claim up to $2500 in deductions of interest paid on that loan. If you qualify, you can use the student loan interest deduction every year until your loan is entirely paid off.
MAGI requirements for the student loan interest deduction are subject to change, so make sure you research current income qualifications for the year that you would like to qualify for this type of deduction.
For more information on education tax credits and deductions be sure to do your research on IRS Publication 970.