Kid in College? Don’t miss out on tax breaks!
Parents of college students, and students themselves, may be eligible for some never used before education-related tax breaks. Normally, only one break is allowed per student, and depending on the break itself, you may only be allowed one per return.
Both tax credits and deductions are available. Tax credits reduce taxes dollar-for-dollar while tax deductions reduce only the amount of income that’s taxed. Let’s explore the options available.
Credits available for higher education expenses include:
- The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
- The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.
Depending on your income, you may not qualify for one of both of these as they phaseout at certain income levels.
The biggest tax savings are with those eligible for the American Opportunity credit. But for those not eligible, the Lifetime Learning credit isn’t necessarily the best alternative either because of the income-based phaseouts.
Even though tax credits are dollar-for-dollar tax savings, you might be better off deducting up to $4,000 of qualified higher education tuition and fees instead. This above-the-line deduction reduces your adjusted gross income and could provide additional tax benefits. But remember, income-based limits also apply to the tuition and fees deduction.
Students themselves might be able to take advantage of the tax breaks if their parent’s income is too high, but additional rules and limits would apply to the credits and deductions too.
Understand your eligible education-related tax breaks. We can help you determine whether a credit or deduction produces the most tax savings for you and your child. Contact us today for advice.