Student Savings: Back-to-School Tax Breaks

Student Savings: Back-to-School Tax Breaks

by Brendon Pack, October 2015

With school back in session, students enrolled in colleges and other institutions of higher education often pay a pretty penny to attain a degree. Fortunately, if you’re aware of ways to cut your tax bill through tax breaks on education, you can lighten your financial load by taking advantage of college tax credit.

Consider these tax-saving measures on higher education:

1. American Opportunity Tax Credit

The American Opportunity Tax Credit is a student tax credit that can be applied to expenses incurred in the first 4 years during which a student attends an institution of higher education. The credit can be claimed on the income tax return of an individual taxpayer, a taxpayer’s spouse, or the dependent of a taxpayer. So if your son, Joey, goes to school to attain a bachelor’s in accounting over a 4-year period, you can claim the credit on your return for education expenses you spend on him.

The credit is worth up to $2,500 per qualifying student. The full value of the credit can be claimed every year for up to 4 years. Remember that the credit may only be applied to qualifying education-related expenses incurred by a student pursuing higher education. Plus, you cannot claim this credit if you are claiming other related tax credits.

The credit can be applied to course materials, such as textbooks, supplemental materials, school supplies, and other items that students need to be successful in their coursework. The credit also covers student activity fees required for enrollment.

The American Opportunity Tax Credit is currently available to individuals whose modified adjusted gross income is up to $80,000 a year and $160,000 for joint filers. The credit is phased out for earners whose income exceeds these amounts. Don’t forget that 40% of the credit is refundable.

2. Lifetime Learning Credit

The Lifetime Learning Credit is designed to reduce a tax bill on a dollar-for-dollar basis for a percentage of tuition, fees, and other education expenses for a student to attend an institution of higher education. The credit can be claimed for yourself, your spouse, or your dependent.

The credit covers “qualified tuition and related expenses.” This includes most tuition and fees paid to a post-secondary school, with the exception of student activity and athletic fees, insurance, and room and board expenses.

The Lifetime Learning Credit is worth 20% of the first $10,000 spent on post-secondary education. Therefore, the maximum value of this credit is $2,000 per household on a per-taxpayer basis. So if your daughter attends a university, you can put the credit toward 20% of the first $10,000 you spend on her educational needs.

To qualify for these college tax breaks, a student must be enrolled in post-secondary school on at least a part-time basis. Also, the college tuition tax break is gradually phased out after a taxpayers modified adjusted gross income exceeds $54,000 and is entirely phased out when this amount exceeds $64,000. For joint filers, these limits are $108,000 and $128,000, respectively. Finally, you cannot claim the Lifetime Learning Credit and the Hope Credit for one student in the same year.

3. Student Loan Interest Deduction

The interest on a loan used for qualified education expenses for yourself, your spouse, or for a dependent is tax deductible, according to IRS guidelines. This write-off can help reduce your taxable income by up to $2,500.

You can claim this deduction if the student loan is in your name or your spouse’s name, even if another individual actually pays the interest on it. The write-off is unavailable for married couples who file taxes separately.

Only individuals whose modified adjusted gross income is no more than $80,000 (or $160,000 for joint filers) are eligible.

Let’s say your husband, Ray, decides to finish his master’s degree in engineering to earn a better salary. As a couple, you can deduct student loan interest on your joint tax return if Ray chooses to take out a loan to help finance his education expenses.

4. Other Education Tax Breaks

Education tax breaks allow tuition and fee deductions that help reduce your taxable income by up to $4,000. Expenses that qualify for the write-off include tuition, textbooks, course supplies, enrollment fees, lab fees, and other expenses that must be paid to attend a post-secondary school. These expenses become tax breaks for students, but expenses like room and board, extracurricular activities, student insurance costs, and other ancillary fees are ineligible.

To qualify for this deduction, you must have paid qualified higher education costs for yourself, your spouse, or for a dependent. Expenses paid by your dependent – a son or daughter, for example – are ineligible for the write-off. You cannot claim the deduction under the married filing separately status. The deduction can only be claimed by individuals earning $80,000 or less in modified adjusted gross income – or $160,000 or less for joint filers.

On a separate note, computers are practically required these days for schoolwork and can add to your student tax breaks. If you can’t use one of the education tax credits for a desktop or laptop computer you need for school, you may be able to claim its amount as an itemized deduction on your student tax return.

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