As we approach August, it is time to start thinking about college as the Fall is fast approaching. For college students and those who love them, that means tuition payments and other fees. The good news is that there are a variety of ways to handle these expenses in a tax-savvy manner.
Tax credits reduce tax liability dollar-for-dollar, so let’s start here. First up is the American Opportunity credit, which was extended through December 2017 by the American Taxpayer Relief Act of 2012.
It can be worth up to $2,500 per eligible student and is available for the first four years of postsecondary education. Qualified expenses include tuition and fees, course-related books, supplies, and qualified equipment. The full credit is generally available to an eligible taxpayer whose modified adjusted gross income (MAGI) falls below $80,000 for singles and $160,000 for married couples filing jointly.
Another tax break to look into: the Lifetime Learning credit. It can be applied to any and all years of higher education, though it can’t be used concurrently with the American Opportunity credit. In 2013, a taxpayer may be able to claim a Lifetime Learning credit for up to $2,000 for qualified expenses paid for a student enrolled in an eligible educational institution. The same $80,000/$160,000 MAGI limit applies.
Deduce your deductions
Tax deductions are also available for some college-related expenses. For example, a tuition and fees write-off of up to $4,000 is available until the end of this year. Generally, the deduction is available for qualified higher education expenses for an eligible student below the $80,000/$160,000 MAGI limit mentioned above.
Taxpayers with MAGI of less than $75,000 as single filers or $155,000 as married joint filers may be able to deduct interest paid on a student loan used for higher education during the coming year. The student loan deduction can reduce the amount of income subject to tax by up to $2,500 — even for those who don’t itemize.
Bear in mind that you can’t claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity credit or the Lifetime Learning credit. Taxpayers must take the credit or the deduction based on which is more beneficial.
The tax breaks mentioned here may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Give us a call to discuss what best fits your specific situation.