It’s August and many parents have children heading to college soon, and there are tax benefits for education. Are you aware you may qualify for some credits or deductions on your income tax return? Following is information you may find helpful regarding this topic:
- A tax credit reduces the amount of income tax you may have to pay.
- A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American opportunity tax credit and the lifetime learning credit. You must meet all three of the following for either credit:
- You, your dependent or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse or a dependent you list on your tax return.
If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.
In the past, there were also deductions you may have been able to take on your tax return. These included:
- Tuition and Fees – The tuition and fees deduction could reduce the amount of your income subject to tax by up to $4,000. You could not claim the tuition and fees deduction as well as an education credit for the same expense.
- Student Loan Interest – if your modified adjusted gross income (MAGI) was less than $80,000 ($160,000 if filing a joint return), there was a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. This deduction could reduce the amount of your income subject to tax by up to $2,500.
In January 2017, Congress failed to renew these deductions, but often deductions are reinstated later in the year. I have not heard that they have become available again in 2017, but find out from your CPA when filing your return next year. If you’d like to read an article discussing the failure to continue these deductions and the impact it may have, see http://time.com/money/4622625/tuition-fees-education-tax-deduction-ends/
To read more information on the IRS website with FAQs about the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC), see https://www.irs.gov/individuals/education-credits-questions-and-answers
If you have a child heading off to college this fall, make sure to keep records of expenses paid to see if you qualify for a tax credit. To see if you currently qualify for education credits according to the IRS, see Am I eligible for an education credit?. And because tax laws change, it’s always a good thing to speak with your CPA to see which credits/deductions apply to you.
