Grants, scholarships and financial aid are all useful for handling the very real costs of a college education, but don’t sleep on tax credits and deductions. Both college students and parents of college students can take advantage of tax breaks that can mean thousands of dollars of savings on tuition, fees, books, and supplies.
Here are some of the best college-related tax credits, deductions and other tax breaks that you may be able to take.
American Opportunity Tax Credit
The American Opportunity Tax Credit allows you to lower your income tax bill by up to $2,500 per student, per year on undergraduate tuition, fees and books. Room and board, though, don’t count.
“But you can only claim this tax credit for four years,” said Meagan Landress, a student loan consultant for Student Loan Planner. To claim the credit, fill out IRS Form 8863 with your tax return.
Who qualifies: Undergraduatecollege students who file their own tax returns or parents who pay the college tuition costs for children listed as dependents on their tax return qualify for the credit.
To earn the credit, your modified adjusted gross income (MAGI) must be below $80,000 if you are filing your tax return as single or as head of household or less than $160,000 if you are filing jointly. You can also get a reduced credit if your MAGI is between $80,000 and $90,000 as a single filer/head of household or between $160,000 and $180,000 as a joint filer. You can calculate your MAGI here.
Lifetime Learning Credit
The Lifetime Learning Credit is similar to the American Opportunity Tax Credit, but structured differently. It allows you to claim 20% of the first $10,000 you paid for tuition and fees in the previous year. Once again, tuition, fees, books and equipment count, but room and board don’t.
The Lifetime Learning Credit, though, isn’t just for undergrads, but also graduate and vocational students, too. There’s also no limit to the number of years that you can claim the credit. You can also only claim one of those two education tax credits in the same year. To claim the Lifetime Learning credit, fill out IRS Form 8863 with your tax return.
Who qualifies: Undergraduate, graduate, or vocational college students who file their own tax returns or parents who pay the tuition of a child they claim as a dependent qualify.
Your previous year’s MAGI must have been less than $59,000 if you filed as a single or head of household or below $118,000 if you filed jointly. You can get a reduced credit if your MAGI is between $59,000 and $69,000 and a single filer or head of household or between $118,000 to $138,000 if you filed jointly.
Tuition and Fees Deduction
Grab this one while you can! The Tuition and Fees Deduction expired on Dec. 31, 2020, but you can still use it one more time to “deduct up to $4,000 of qualified higher education expenses from your taxable income,” Landress said. That includes tuition, books and fees.
To claim the deduction, use the information found on Form 1098-T from your school to see how much you spent on qualified education expenses. Then fill out and submit IRS Form 8917 with your tax return.
Who qualifies: Undergraduate, graduate, or vocational college students who file their own tax returns or parents who pay the college expenses for a child they claim as a dependent are eligible.
A $4,000 deduction is available for single filers or head-of-household filers with a MAGI of $65,000 or less or $130,000 or less for joint filers. A $2,000 deduction is available for single filers or head-of- household filers with a MAGI between $65,001 and $80,000 or between $130,001 and $160,000 for joint filers. You can’t claim this deduction and one of the tax credits from above.
If you qualify for an education credit, that’s usually a better choice, said Tracie Miller-Nobles, a certified public accountant and a consumer financial education advocate for the American Institute of CPAs.
“That’s because a tax credit reduces a taxpayer’s tax liability dollar for dollar,” she said. “That’s not the case for a deduction.”
Who qualifies: Anyone who paid interest on a qualified student loan in the eligible tax year is eligible as long as they are not claimed as a dependent on someone else’s tax return. For 2020 taxes, the deduction is available to a single or head-of-household filer with a MAGI less than $70,000 or less than $140,000 for a joint filer. The deduction is reduced for single or head-of-household filers making between $70,000 and $85,000 or between $140,000 and $170,000 for joint filers. Married people who file separately are not eligible for the deduction.