Available Tax Credits May Offset College Costs
If college is just around the corner for you or for one of your children, no doubt you are worried about college costs. It’s no secret that tuition at public colleges and universities has soared in the past decade.
There are some key tax credits designed to lessen burden of college costs and to make college accessible for students and their families.The information in this post is for information purposes only and is not intended to replace the advice of a qualified tax professional
Here’s a look three of those college tax credits:
American Opportunity Tax Credit: This credit applies for the first four years of undergraduate study. Students must be enrolled at least half-time in a program that will lead to a degree, certificate or other widely accepted credential.
If your Modified Adjusted Gross Income (MAGI) is below the annual limit for your tax status (filing single or head of household, or married filing jointly) you can claim up to $2500.00 in college costs. This applies to eligible expenses such as books, tuition, and fees not covered by financial aid or scholarships. Housing costs aren’t eligible for the credit.
The credit will phase out as income increases and reaches the annual limit for that tax year.
Likewise, if you are claimed as a dependent on a parent or guardian’s tax return, you won’t be eligible for the credit. The credit amount will phase out as your income increases, disappearing completely if your MAGI reaches the annual limit. Keep all receipts for tuition, books and fees in a safe place so you can refer to them on tax filing day.
If you’re not sure if you qualify as an independent student, your school’s financial aid webpage should specifiy the guidelines, or you can check with a tax pro. The rules for qualifying as an independent student can be vague, so it’s best to check with someone who is familiar with both the IRS guidelines and the financial aid definition of “independent student.”
You will also receive a 1098-T form from your school if you’re an independent student, or your parents will receive one if you’re classified as a dependent student. In most cases, the 1098-T can be downloaded from your student account portal toward the end of January, or mailed to your home or your parents’ home. Either way, you’ll need to refer to it when filing your taxes or when your parents file their taxes.
Lifetime Learning Credit: This credit will assist you or a dependent student with college costs beyond the first four years, either undergraduate or graduate study. There is no time limit to this credit, as long as you meet the income requirements based on your Modified Adjusted Gross Income (MAGI)
Like the American Opportunity Tax Credit, this credit will phase out as your income increases and will disappear altogether once your income reaches the established annual limit for your tax status. You can claim up to $2,000 in college costs per year with this credit, as long as your school is fully accredited and meets the eligibility requirements for participating in the U.S. Department of Education Student Loan Program.
Eligible costs include tuition, fees, and book expenses after student loans, scholarships or grants have been applied to your college costs.
The 1098-T form will either be sent to your home or downloaded into your student account portal beginning in January. You’ll need it when filing your taxes.
IRS form 8863 will also need to be completed and filed on tax day.
Taking the Sting Out of Student Loans
Student Loan Interest Deduction: If you or your parents paid more than $600.00 in student loan interest during the calendar year, either you or your parents can apply the Student Loan Interest Deduction for a maximum deduction of $2500.00.The qualifying student loan must be for the taxpayer, spouse, or dependent child. If you were claimed as a dependent on a parent or guardian’s tax return, you won’t be eligible to claim this credit, but your parents or guardian will be able claim it.
This deduction phases out at different income levels that are set each year. Your Modified Adjusted Gross Income (MAGI) must meet certain guidelines in order to qualify. The credit will phase out completely once your MAGI reaches the annual limit for that year.
The student loan must be for eligible expenses such as books, tuition, fees, equipment, housing and transportation costs not covered by financial aid, scholarships or grants.
The student loan company will issue a 1098-E before tax season. Make sure you or your parents keep it handy for tax filing day, as it will specify the amount of interest you or your parents paid during the calendar year.
If this will be your first tax year claiming one or more of these credits, or the first tax year for your parents, it’s best to check with a qualified tax pro who can walk you through the forms and worksheets, or complete them on your behalf. You will receive the guidance you need to make the most of your college investment.