Moving on to college is a big milestone that comes loaded with responsibility. One of those responsibilities is to lay the foundation for financial security. Part of financial security is knowing how your life decisions affect your taxes. Your decision to go to college comes with tax credits and deductions! As you move into your college living arrangements, congratulate yourself as you make a great investment in yourself and your immediate tax future.
Post-secondary education mainly affects your federal taxes in two ways: with credits and with deductions.
The American Opportunity Credit was recently extended through December 2017. It allows for a credit of up to $2,500 for tuition and related expenses for each of the first four years attending college at least half-time. Individuals who earn no more than $90,000 and couples earning no more than $180,000 are eligible for the full American Opportunity Credit.
If you don’t claim the American Opportunity Credit, the Lifetime Learning Credit may be the credit for you. It is a nonrefundable credit (a tax credit that can't reduce the amount of tax owed to less than zero) of up to $2,000 per tax return. The limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:
- Tuition and fees required for enrollment or attendance qualify, as do other fees required for the course. Additional expenses (like books or technology fees) do not.
- The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
- Income limits are lower than under the American opportunity tax credit. For 2013, the full credit can be claimed by individual taxpayers whose modified AGI is $63,000 or less. For married couples filing a joint return, the limit is $127,000. The credit is phased out for taxpayers with incomes above these levels.
If you don’t claim either of the education tax credits, you still have the option to deduct up to $4,000 by taking the Tuition and Fees Deduction. The income limits for the tuition and fees deduction are $80,000 for single taxpayers and $160,000 for married couples filing jointly
A qualified tuition plan, or 529 plan, can help you save on taxes while providing for your child’s education. The state-by-state 529 plans authorized by the Internal Revenue Service allow you to invest and earn interest on the funds without subjecting you to federal income taxes. You must ensure that the withdrawals are spent on eligible education expenses, including tuition and room and board. Otherwise, you’ll get hit with income taxes after the money is spent.