Even though the price of
college increased only 2.9
percent in the last year, the average cost for four years of education
in an undergraduate program at an in-state public school is still a staggering $73,564.
When searching for ways to lighten the load of higher education costs, the
information on tax breaks can seem overwhelming. This simple guide to the
tax deductions can help avoid confusion and lower college costs.
American Opportunity Tax Credit (AOTC)
The AOTC is the most
lucrative tax break for undergraduate students pursuing their degree full time.
Under the AOTC, students or parents of students are eligible for up to $2,500
in credit for four academic years. This tax credit pays for 100 percent of the
first $2,000 spent on eligible expenses and 20 percent of the next $2,000
There are limitations
to the AOTC. Those families making $160,000 or more receive decreased credit or
none at all. Single tax filers can't make more than $80,000 for full credit. If
a student files as a dependent, only the parent can receive the deduction.
Students filing independently are eligible for the full credit. For students
pursuing an undergraduate degree full-time, the AOTC is the best option for
gaining the largest tax break.
Lifetime Learning Tax Credit (LLTC)
While the AOTC is more
lucrative in terms of monetary compensation, the LLTC provides lifelong
learners with a credit. Those applying for the LLTC can claim 20 percent
of up to $10,000 in school expenses for tax purposes, resulting in a total tax
break of $2,000.
Although the LLTC
offers $500 less than the AOTC, it does offer additional benefits. First,
the student does not have to be enrolled half-time. An odd credit or class can
be used to claim the LLTC. Also, the AOTC is only applicable to undergraduate
courses whereas the LLTC can be used for post-graduate courses.
The LLTC is a great
credit for adult learners looking to advance their degree on a part time basis.
To qualify, the filer must have a joint return of no more than $104,000
adjusted gross income or $52,000 as an individual return. Tax filers can only
apply for either the LLTC or AOTC, not both, when filing.
529 Plan College Savings
If you're just looking
into your young daughter or son's education or facing your child's senior year
of high school, the best investment for parents paying college expenses
continues to be a 529 College Savings Plan. 529 Plans are state run saving
plans that can be applied to any college in the country. Some states even offer
additional tax benefits for investing in a 529 Plan.
While a 529 Plan is not
eligible for tax breaks on a federal tax return, the investment is
tax-deferred and distributions are tax free. It is important for parents
investing in a 529 plan to keep in mind that these distributions are often
not counted as part of eligible expenses under the AOTC or LLTC.
Student Loan Interest Deduction
paying student loans will be happy to realize that up to $2,500 of interest
paid on the loans are eligible for federal tax deductions. This
"above-the-line" exclusion does not required an itemized deduction so
it's a simple break at tax time.