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4 Valuable Tax Breaks For College Students
Seventy-one percent of students who graduate from a four-year school leave college with student loan debt. And the average graduate who took out loans to pay for school now walks away with over $37,000 to pay off.
Clearly, an education can be a huge financial burden. Thankfully, tax season can give you a little relief.
There are a number of tax credits and deductions for students, as well as recent graduates and families with children in school. (A tax credit reduces the amount of income tax the IRS requires you to pay, while a deduction minimizes the amount of your income that is taxable.)
Take a look at these four tax credits and deductions to find out if you might qualify for a break on your education expenses.
1. American Opportunity Tax Credit
With the American Opportunity Tax Credit (AOTC), you can get an annual credit of $2,500 per eligible student for qualified education expenses, such as tuition. And if your tax liability is low and you do not owe the IRS, you can get up to 40 percent of the credit in cash refunded to you. That credit can mean an extra $1,000 in your bank account.
To be eligible, you or your dependent must currently be pursuing a degree and be enrolled at least half-time. You can only apply for the credit for four years, so if you take longer than that to complete your degree, you are no longer eligible.
To get the credit, your income must be $80,000 or less as an individual, or $160,000 for couples who are married and filing their taxes jointly. To claim AOTC, complete Form 8863 and attach it to your Form 1040 or 1040A.
2. Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is worth up to $2,000 and is for qualified educational expenses, such as tuition and fees. But the LLC credit is not refundable; if the credit brings your tax liability to zero, you will not get any money back, unlike the AOTC.
However, while the AOTC has a four-year maximum, there is no limit on how many years you can claim the LLC. If you take courses throughout your professional life, you can file for LLC.
To be eligible, you or your dependent must be enrolled in an approved educational university or college. You must be enrolled for at least one academic period, such as a semester, during the tax year.
To get the credit, your income cannot exceed $65,000 if you’re single or $131,000 if you’re married and filing jointly. Like AOTC, to claim the LLC, you must complete Form 8863.
3. Tuition And Fees Deduction
The tuition and fees deduction allows you to deduct up to $4,000 on your tax return, reducing your taxable income. But because it is a deduction and not a refundable credit, you do not get any of that money back if your tax liability is zero.
You can take the deduction if you are a student, spouse of a student, or if the student is your dependent. The expenses you deduct must be involved with higher education and cannot include living expenses like room and board.
To be eligible, you must make under $80,000 if you’re single or $160,000 if you are married and filing your taxes together. You can get the deduction even if you do not itemize your taxes.
4. Student Loan Interest Tax Deduction
If you are a student or a parent of a student and made payments on a qualifying student loan, you can deduct up to $2,500 of the interest you paid over the course of the year. And even if you made extra payments, you can deduct the extra interest you paid off.
To qualify, you or a dependent must have paid interest on a student loan in 2016. Your filing status must be single or married filing jointly; if you file your taxes as married filing separately, you are not eligible for this deduction.
Your income cannot exceed $80,000 if you’re single or $160,000 if you’re married. Loans that don’t qualify include loans offered by a relative or friend or employer-offered loans. You can use a student loan interest deduction calculator to see if you qualify for this tax break and for how much.
Claiming Credits And Deductions
When it comes to AOTC, LLC, and the tuition and fees deduction, it’s important to understand the limitations. You can claim all three on a tax return, but not for the same student or the same expenses. For example, if you have one child, you cannot claim her expenses for both the AOTC and LLC. Only one education benefit can be claimed for each student.
And if you received other forms of financial assistance, such as a tax-free grant, the IRS requires you to deduct the grant amount from your qualified education expenses before claiming a credit or deduction.
College can be expensive, but the government does offer some help. When filing your taxes this year, keep these four major credits and deductions in mind to reduce your tax bill and maximize your refund.