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 spent.
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
Those individuals 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.