5 Tax Breaks for College Costs
Besides scholarships (tax-free up to the cost of tuition and course-related expenses, such as books and supplies), there are several tax breaks designed to ease the effects of college costs, whether you’re saving to send your kids to college, paying for yourself, or considering some graduate work. The following 5 tips can help you take advantage of college tuition tax breaks available to you.
1. The Student Loan Interest Deduction
Student loan interest is interest you paid during the year on a qualified student loan. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions on Form 1040, Schedule A, Itemized Deductions.
You can claim the deduction if all of the following apply:
• You paid interest on a qualified student loan in tax year 2016;
• You’re legally obligated to pay interest on a qualified student loan;
• Your filing status isn’t married filing separately;
• Your MAGI is less than a specified amount which is set annually; and
• You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
• For you, your spouse, or a person who was your dependent when you took out the loan;
• For education provided during an academic period for an eligible student; and
• Paid or incurred within a reasonable period of time before or after you took out the loan.
If you paid $600 or more of interest on a qualified student loan during the year, you’ll receive a Form 1098-E, Student Loan Interest Statement, from the entity to which you paid the student loan interest.
2. 529 Savings Plans
529 plans let your earnings escape federal tax completely if the withdrawals are used for qualified college expenses, including tuition, fees, and room and board. Two-thirds of states give residents a tax deduction or another tax break for contributions. You are may invest in other states’ 529 plans, although to get the tax break, you’ll usually need to invest in your home state.
The attractiveness of 529 plans lies in their easy access as well as the tax benefits the provide. The plans set no income limit and have a high limit on contributions. If your kid skips college, you can change the beneficiary to a sibling or other relative without losing the tax break. But make sure to use the money for non-college expenses or you’ll be on the hook for taxes and a penalty on earnings.
3. The American Opportunity Tax Credit
The American Opportunity Tax Credit is worth up to $2,500 per student for each of the first 4 years of college. A student must be enrolled at least half-time for one academic period during the year in a program leading to a degree, certificate or other recognized educational credential.
To qualify for full credit, your adjusted gross income must be less than $80,000 if you are single or filing as head of household, or less than $160,000 if you are married filing jointly. The size of the credit begins to phase out as your income rises, disappearing entirely for singles and heads of household earning more than $90,000, and for couples filing jointly earning more than $180,000. Money spent on tuition, fees and books (but not room and board) does count toward the credit.
The credit is worth 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000, totaling $2,500 for each of the four years. You can claim the credit by filing IRS Form 8863 with your Form 1040. Also see IRS Publication 970, Tax Benefits for Education for details.
4. The Lifetime Learning Credit
The Lifetime Learning Credit is much more flexible than the American Opportunity Tax Credit. There is no limit to the number of years you can claim the credit, and the course must either be part of a postsecondary degree program or be taken to acquire or improve job skills. The course must be offered by an eligible educational institution, such as any college, university, vocational school or other postsecondary educational institution eligible to participate in the U.S. Department of Education student aid program.
The Lifetime Learning Credit is worth 20% of the first $10,000 of tuition, for a maximum of $2,000 per tax return. To qualify for the full credit for 2016, your income must have been less than $55,000 if single or filing as head of household, or less than $111,000 if you’re married filing jointly. The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $55,000 and $65,000 ($111,000 and $131,000 if you file a joint return). You can’t claim a lifetime learning credit if your MAGI is $65,000 or more ($131,000 or more if you file a joint return)..
You claim this credit by filing IRS Form 8863 with your 1040. For more information about the rules, see IRS Publication 970, Tax Benefits for Education.
5. Tax-Free Savings Bonds
If you redeem I bonds and EE bonds issued after 1989 to pay college tuition, you may not have to pay taxes on the interest you earned. To qualify for the tax break, the bond owner must use the money to pay qualified education expenses (tuition and required fees, but not room and board) for himself, his spouse or a dependent. The bond owner must have been at least 24 years old when the bond was issued. That means the bonds must generally be owned by the parent, not the child. The child can be a beneficiary of the bonds but can’t have a co-owner.
You can qualify for the full interest exclusion if your modified adjusted gross income in 2016 is less than $116,300 if married filing jointly or $77,550 for single filers. You can take a partial exclusion if your income is less than $146,300 for joint filers or $92,550 for single filers. The tax break disappears if your income is higher than that.
And, like I said, don’t forget scholarships!
If you have questions about college fee tax breaks, call us at the Florida offices of TaxProblemSolver.com today at 727-894-2099 or 407-629-5923. Or you can email me, Larry Heinkel at larry@taxproblemsolver.com. Our team of IRS Enrolled Agents (EAs), Tax Resolution Attorney and CPA helps taxpayers NATIONWIDE and we’re here to provide quality assistance to your most important tax issues.
About the Author Larry Heinkel J.D. LL.M
Larry Heinkel is a tax and bankruptcy attorney with more than 38 years experience helping businesses and individuals, solve their state and federal tax problems. Mr. Heinkel has been extremely successful in representing his clients before IRS and DOR, and is known throughout Florida as an expert in tax problem resolution.
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