College Tax Credits

College is expensive. Educational tax benefits can help students offset the cost of college by reducing their or their parents’ federal tax bill. The person filing taxes can claim a tuition tax credit for money spent on your college expenses if you are listed as their dependent. Many American families, however, aren’t aware these programs exist. The federal government offers a range of tax breaks designed to help families save and pay for college. These include tax credits, as well as several tax deductions. The main difference between tax credits and tax deductions is that credits are discounted from the amount of tax you owe, rather than reducing your taxable income. Here are three key benefits to be aware of as your child plans for college.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses for an eligible student for the first four years of higher education. The amount of credit is 100 percent of the first $2,000 and 25% of the next $2000 (or up to $2500 total) for tuition, fees, and required course materials paid for students enrolled at least half-time in college. Expenses for room, board, transportation, and personal expenses are not included. Up to $1,000 of the credit is refundable even if you owe no Federal income tax. There is a limit of four years of credit per student, and it cannot be claimed in the same year as a Lifetime Learning Credit or the Tuition/Fees deduction. To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is similar to the AOTC but less restrictive. This credit is for qualified tuition and related expenses. This federal tax credit can reduce your taxable income by up to $2,000 if you're pursuing an undergraduate, graduate, vocational, or non-degree program. Course supplies, living expenses, and transportation costs are not qualified expenses for the Lifetime Learning Credit.

The credit is available for 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return. The LLC is not refundable, so you can use the credit to pay any tax you owe, but you won’t receive any of the credit back as a refund. There is no limit on the number of years this credit can be claimed, but it cannot be combined with the American Opportunity Tax Credit in the same tax year. Who’s eligible in 2023: For tax year 2023, the amount of your LLC is gradually reduced (phased out) after your MAGI reaches between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

How to Claim College Tax Credits

Claiming college tax credits is a straightforward process, typically done when filing your annual tax return. To claim these credits, you will need to:

• Obtain Form 1098-T: Educational institutions are required to provide Form 1098-T, which summarizes the tuition payments made during the tax year.
• Complete IRS Form 8863: This form is used to calculate and claim the AOTC or LLC. You will need to provide information about the student, educational institution, and expenses paid.
• Include the Credit on Your Tax Return: When filing your taxes, include the calculated credit amount on the appropriate line of your tax return.

College Savings Accounts

Opening a 529 account allows families to pay for future expenses associated with college. Contributions to a 529 plan are not deductible and do not have to be reported on federal income tax returns as long as the money you withdraw is used to pay qualified education expenses. The contributions will grow over time while benefiting from tax advantages such as tax-deferred earnings and tax-free distributions. Qualified education expenses include:

• Tuition and fees: Funds can be used to pay for tuition and mandatory fees for enrollment at an eligible institution.
• Room and Board: Students need to be enrolled at least half-time; room and board can be covered by a 529 fund up to the allowance calculated by the schools.
• Books and Supplies: Necessary books, supplies, and equipment required for coursework.
• Technology Expenses: Computers, software, and internet access may be considered qualified expenses.

In addition to these three educational tax benefits, parents and students may be eligible for a host of other educational tax benefits. Families should investigate all available options, and consult with an accountant or tax consultant to decide on the most beneficial educational tax benefits. For more information on tax credits, visit IRS Tax Benefits for Education: Information Center.

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