Tax Benefits that Help Cover the Cost of CollegeFeb 17, 2023
College is expensive, but two educational tax benefits can help U.S. students offset the cost of college by reducing their or their parents’ Federal tax obligations. Many American families, however, aren’t aware that these programs exist. In fact, the U.S. Government Accounting Office estimates that 14 million eligible families miss out each year. Here are the key benefits to be aware of as your child plans for college.
Lifetime Learning Credit: The Lifetime Learning Credit allows American families to claim a tax credit of up to $2,000 on the first $10,000 spent on qualified educational expenses. Qualifying educational expenses include tuition, required fees, and course-related books, equipment, and supplies. The room, board, transportation, and personal expenses are not included. 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: Families with a modified Adjusted Gross Income of up to $138,000 if married and filing jointly; or up to $69,000 for single, head of household, or widowed taxpayers.
American Opportunity Tax Credit: The American Opportunity Tax Credit allows parents to claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 (or up to $2,500 total) for tuition, fees, and required course materials paid for students enrolled at least half-time in college. The 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, which cannot be claimed in the same year as a Lifetime Learning Credit or the Tuition/Fees deduction.
Who’s eligible: Families with a modified Adjusted Gross Income of up to $180,000 if married and filing jointly, or up to $90,000 for single, head of household, or widowed taxpayers. Students must be pursuing a degree or a recognized educational credential. In addition to these Federal tax credits, the Student Loan Interest Deduction also provides tax benefits. This tax benefit allows taxpayers to deduct up to $2,500 in interest payments on Federal and private student loans used to pay educational expenses. The taxpayer claiming the deduction must be legally obligated to pay the loan. Therefore, a parent cannot claim it if they’re paying off a student loan taken by the student, but they can claim it if the parent has taken a parent PLUS loan or a loan specifically for educational expenses for the student. On the flip side, students may claim the deduction for student loan payments only if their parents are no longer claiming the student as a dependent for tax purposes.
Who’s eligible: Families with an Adjusted Gross Income of up to $170,000 if married and filing jointly, or up to $85,000 for single, head of household, or widowed taxpayers. Learn more at the IRS, Tax Benefits for Education Information Center, Tax Benefits for Education: Information Center | Internal Revenue Service (irs.gov)
Do you want to learn more about college planning and process? Schedule a no-cost consultation with Ryan Clark to learn more!
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