Are you saving for college, currently paying tuition, or paying on a student loan? Or do you have children that may go to college in the future? If so, there is probably a tax break for you. Higher education can be very expensive, but there are ways to possibly get some of your money back including credits, deductions, and other types of savings.
Credits:
- American Opportunity Tax Credit: This is the most common credit for first time college students. This is only available for expenses incurred by students who are in their first four years of undergraduate study. Students must attend college at least half-time and must be pursuing a degree. Qualified expenses for this credit include tuition, fees, books, supplies, and equipment needed for classes. Room and board expenses cannot be claimed. For this credit, you get 100% for the first $2,000 spent on qualified education expenses, and 25% of the next $2,000, for a total of a $2,500 credit, of which $1,000 is refundable. This means you need $4,000 in expenses to claim the full credit. There are income phaseouts for this credit. Form 1098-T must be provided from the educational institution, and Form 8863 must be completed for this credit.
- Lifetime Learning Tax Credit: Unlike the American Opportunity Credit, this is not limited to undergraduate expenses, and students do not need to attend college half-time. This credit can also be claimed for classes taken to improve job skills. There is also no limit on the number of years that this credit can be claimed. For this credit, you can claim 20% of the first $10,000 out-of-pocket cost for tuition, fees, and books for a maximum credit of $2,000. This credit is not refundable. There are income phaseouts for this credit. Form 1098-T must be provided, and Form 8863 must be completed for this credit. Form 1098-T must be provided from the educational institution, and Form 8863 must be completed for this credit.
Deductions:
- Student Loan Interest Deduction: This deduction is for interest paid on a student loan used for higher education. This deduction can be taken even if you do not itemize on your tax return. This is limited to $2,500 of student loan interest paid each year. This deduction is limited if your income is above $70,000 ($145,000 if filing jointly).
Other Tax Savings:
- 529 Plans: From the time a child is born until the time that they go to college, parents can contribute to a 529 Plan. This account grows tax free and there is no tax on distributions from this account if used for qualified college expenses including student loan payments. With changes from the Tax Cuts and Jobs Act, these funds can also be used for Elementary and High School Tuition. In addition, several states offer tax breaks for residents that contribute to a 529 plan.
- Coverdell Education Savings Accounts: This is very similar to a 529 plan, but there are limits on who can contribute, how much can be contributed, and how long money can stay in the account. The maximum contribution per year is $2,000.
- Early Distributions from IRAs: Generally, if you take money out of your IRA before you reach age 59 ½, you will be subject to a 10% tax on the distribution. However, distributions used to pay for qualified higher education expenses are exempt from this penalty.
- Scholarships and Fellowships: Both may be nontaxable if certain requirements are met. The student must be a candidate for a degree at an educational institution, and the amounts received must be used to pay for tuition, fees, books, and supplies required for attendance at this institution.
We understand that tax law can be confusing and hard to decipher. Here at ADKF, P.C., we have dedicated tax specialists that can help you navigate the tax code to your benefit and ensure you are getting every deduction possible. If you are curious whether you qualify to receive higher education tax break, please reach out to ADKF, PC. and we are happy to help you!