It doesn’t take an advanced degree holder to know that college can be one of the biggest expenses anyone can incur.
Even if you begin a dedicated savings plan for your son or daughter’s future education, college can still be a costly endeavor; with the average undergraduate tuition at $9,640 for in-state public school students ($24,930 out of state), that’s not taking into account the additional costs you’ll pay for on-campus housing, textbooks, meal plans, transportation and other fees.
While you can cut some of these costs by utilizing your savings, or applying for financial aid and scholarships, there are various college-related tax deductions to help you save additional money and make higher education a bit more affordable from year to year.
Before filing your income taxes this year, look into some of these tax breaks first:
529 college savings plans
You can open and contribute to a 529 college savings plan no matter what state you live in, allowing for tax-free withdrawals as long as they’re earmarked for educational expenses. While not every state allows for tax deductions on contributions to your account, about two-thirds permit deductions, and five states allow you a tax break on 529 plan contributions made in any state in the U.S. This is important to know, since 529 plans are mostly state run.
Consulting this chart will help you determine how much you may be able to deduct in 529 plan contributions this tax cycle. Some states, like Illinois, Nebraska and Mississippi, allow state income tax deduction limits up to $10,000; Pennsylvania boasts a $14,000 maximum deduction.
Tuition and fees
You can ameliorate some of the financial impacts of college tuition by claiming it and other fees on your tax return. Make a deduction for tuition and fees, and you could potentially reduce your taxable income by up to $4,000.
Obtaining the tax break is possible if in the last school year you paid for qualified educational expenses mentioned above, like tuition, fees and other costs associated with enrolling in and eligible, accredited educational institution.
There are some limitations that could exclude you from deducting tuition on your tax return. You’ll need to earn no more than $80,000 per year if you’re a single filer or head of household -- $160,000 if you’re married and filing a joint return. You can qualify if the educational costs were paid for yourself, a spouse or dependent, but if you’re a parent claiming the deduction for a child, make sure to list them as a dependent or the deduction won’t be allowed. The taxpayer, not the dependent, must also pay the expenses to claim the tax break.
One last word on tuition and fees deductions: the tax break officially expired at the end of the 2016 tax year, but you can still get a deduction this year if you prepaid some tuition costs last year for any of the 2017 school semesters, either upfront or through a student loan. (Scholarship and financial aid money don’t apply.)
Student loan interest
Speaking of student loans, you can’t claim the actual loan itself, but you can file for a tax deduction on the interest you pay on either a federal or private loan used for higher education purposes.
You can deduct up to a total of $2,500 in student loan interest if you fall under the same Modified Adjusted Gross Income (MAGI) requirements noted above ($80,000 single filer, $160,000 jointly filing), so if you earn more, file separately from your spouse, or if you (or your spouse) can be claimed as a dependent, you won’t be eligible for this tax break. You’ll know how much student interest you’ve paid by obtaining a copy of Form 1098-E, and to add this deduction to your tax return, you’ll need to fill out Form 1040.
If you didn’t pay up to $2,500 in student loan interest last year, you can make up for it by deducting any loan origination fees you may have paid, as well as credit card interest if you used your card to pay for eligible education expenses.
American Opportunity Tax Credit
Two tax credits exist that you can file on your income tax return if your expenses have paid for tuition, fees or course material costs. One is the American Opportunity Tax Credit. It gives tax filers a credit up to $2,500 towards education costs including tuition and other fees paid during the tax year only for undergraduate students enrolled at least half time in a degree or certificate program.
How is the $2,500 calculated? The credit amounts to an initial 100 percent of the first $2,000 spent towards educational costs, and a further 25 percent of the next $2,000 -- so, much like the maximum deduction you can make for tuition and fees, the American Opportunity Tax Credit is essentially a $2,500 refund of the $4,000 you may spend.
Forty percent of the credit -- $1,000 of the $2,500 -- is also available as a refund to you. Remember, it’s a credit, not a deduction, so it counts as extra money even if you owe no taxes. Students can also claim the credit for themselves even if they’re not listed as a dependent. Use IRS Form 8863 with Form 1040 when claiming this credit.
Lifetime Learning Credit
The second college tax credit is the Lifetime Learning Credit, whose maximum benefit -- at $2,000 per tax return -- is worth 20 percent of the first $10,000 in tuition costs.
Easily more accessible than the American Opportunity Tax Credit, you don’t need to be enrolled at least half-time as a postsecondary undergrad to qualify; you could simply be taking one matriculating course at your local community college and still be eligible for the credit.
However, there are more stringent income limitations if you’re looking to cash in on the Lifetime Learning Credit. Unlike other credits and deductions, if you’re a single filer and make more than $55,000 to $65,000, you won’t qualify for the full credit. Limits for married and joint filers are $110,000 and $130,000. Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit isn’t refundable; so, if you owe no taxes and have any leftover credit remaining, you won’t be able to receive any money back.
Depending on your financial and educational status, you may want to carefully choose if the American Opportunity Tax Credit or Lifetime Learning Tax Credit is right for you before filing your taxes.
Savings bond interest
Savings bonds can be redeemed to pay for a variety of expenses, but if you devote them to educational costs you may not have to pay any taxes to Uncle Sam on the interest earned from your contributions, since it would normally count as income.
Specifically, Series I or EE bonds issued anytime after 1989 are eligible for a tax deduction if you cashed out the bond to pay for higher education expenses like tuition or fees paid for courses part of a degree- or certificate-granting program for yourself, a spouse or dependent. To claim the deduction, you’ll need to stay under a $77,200 MAGI limit for single filers, $115,570 for married joint filers. It also can’t be claimed if you’re also seeking any tax credits, like the American Opportunity Tax or Lifetime Learning credits, according to TurboTax.
Additionally, to avoid having to pay taxes on your savings bond interest, your qualified educational expenses will need to have been made in the same calendar year you redeemed your savings bonds. Bond owners must also be at least 24 years old when the bond was opened and issued.
The federal income tax filing deadline for 2017 is on Tuesday, April 18, so you’ve still got some time to incorporate some of these educational tax deductions into your tax return form before sending it off. College costs may add up from year to year, but taking advantage of tax breaks, deductions and credits where they count can help save money in the smartest way possible.