College education doesn’t come cheap. The college costs for the 2020-2021 school year on average added up to more than $27,020 when attending a four-year public institution. Fortunately, there are tax deductions and credits that can help students reduce their taxable income up to $4,000 depending on their income and filing status.
In other words, if you covered the costs of a degree program for yourself, your spouse, or your dependent in the past year, you can apply for a tax deduction to increase the return on your investment and ease the financial burden on your income. You can also apply for tax credits designed to help people who are saving for college or students who need help to pay for their tuition and books while in college.
What are qualified education expenses?
It is important to remember that not all college expenses are deductible. Only qualified education expenses can be taken into consideration when filing for a tax deduction and tax benefits.
Tuition and fees – are the subject of tax deductions and can reduce your taxable income by up to $4,000. It is an “above-the-line” deduction that doesn’t require itemization to claim. It includes student fees, as well as expenses for course-related books, supplies, and equipment required as a condition of enrollment at an educational institution or cost of attendance.
Student loan interest – is one of the eligible expenses but only when the student has taken a qualified student loan destined exclusively to cover education expenses. A loan interest deduction reduces taxable income by up to $2,500.
American Opportunity Tax Credit (AOTC) – a refundable tax credit, AOTC is one of the two credits available to individuals attending college courses. It includes tuition and expenses required for enrollment or attendance – fees, books, supplies, equipment. Taxpayers can benefit from a deduction of up to $2,500 for up to four years.
Lifetime Learning Credit (LLC) – a non-refundable tax credit that doesn’t allow you to get a refund if the credit lowers your tax liability to below zero. It can prove useful if you’re paying for undergraduate education, graduate school, or technical school. LLC includes tuition and fees, as well as course-related books, supplies, and equipment paid to the education institution.
What expenses don’t qualify as education expenses?
While they may be associated with your enrollment or college attendance, the following are not qualified expenses:
- Room and board
- Insurance
- Medical expenses, including student health fees
- Transportation
- Personal living or family expenses
- Non-credit courses, except if they are included in a degree program
- Classes that involve sports, games, or hobbies
- Expenses paid with tax-free scholarships or another tax-free award
Who is eligible for college education deductions?
College expenses are deductible if they have been covered by you or your spouse if you file joint returns, a student who is a dependent on your return, or a third party, including relatives or friends. Eligible taxpayers should have paid for the qualified education expenses by cash, check, credit or debit card, or with money from a loan. You are ineligible for college expense deductions if you have been a nonresident alien for part of the tax year.
Tuition and fees – the deduction can amount to up to $4,000 depending on your modified adjusted gross income (MAGI) and filing status. To get the full amount of $4,000, you need to have a MAGI less than $65,000 as a single filer or less than $130,000 as married joint filers. Single taxpayers with an income higher than $65,000 and less than $80,000 will benefit from a deduction of $2,000. Married filing when the income passes $130,000 gets a deduction of $2,000. However, if the MAGI is more than $80,000 for single filers and $160,000 for married couples, you will not be eligible for tuition and fee deductions.
Student loan interest – to benefit from this deduction, the student must be the taxpayer, spouse, or dependent, and they have to be enrolled at least half-time at an eligible institution. Moreover, the program must lead to a degree, certificate, or other recognized credential, and the loan can’t be granted by a related person or a qualified employer plan. The MAGI should be less than $85,000 for single filers and less than $170,000 if you are filing a joint return.
ATOC – being a refundable tax credit, ATOC can increase the size of your tax refund even if your tax liability drops below zero. The benefit is available for expenses incurred by students in their first four years of undergraduate study and only if they have attended college at least half-time for a certain academic period. The claimed amount depends on your MAGI – you can get the full $2,500 credit if your MAGI is no higher than $90,000, for a single filer, and $180,000 for couples who file a joint tax return.
LLC – to be eligible for the full $2,000 LLC, your MAGI should be lower than $69,000, if you are single, or $138,000, if you file a joint tax return. If you are married but filing separately or if someone else is claiming you (or the student you paid for) as a dependent, you will not be entitled to file for the deduction. One of the advantages of the LLC is that there is no limit on the number of years you can claim it. Moreover, unlike the ATOC, the LLC doesn’t apply only to students attending at least half-time.
Consider working with a financial advisor
A financial advisor can prove to be helpful if you are planning to file for college expense deductions. Due to the numerous criteria you need to take into consideration for a successful filing, it is best to discuss this matter with an expert and determine the deductions and credits you qualify for. Pay attention to the financial documents required, and make sure you have them all ready to go before the filing deadline.
Remember that you cannot claim all deductions and credits available to reduce the financial burden of college education and choose wisely the category that best suits your financial needs. For example, if you claim an ATOC or LLC credit, you will not be able to also claim tuition and fee deductions in the same year. Moreover, you cannot claim a credit for education expenses paid with tax-free funds. Familiarize yourself with the rules that prevent duplicate tax benefits and make informed decisions.
