Federal tax credits and benefits abound
Families paying for college have a number of tax credits and benefits available that can possibly get them cash back each year. The following are some ways to save when paying for education.
American Opportunity Tax Credit
Parents may claim a tax credit for 100 percent of the first $2,000 and 25 percent of the next $2,000 of a dependent child’s college tuition and mandatory fees, for a maximum $2,500 annual tax credit per child. Students may claim the credit only if they are not claimed as a dependent on another person’s tax return. The credit is allowed only for students who are attending a degree program at least half time and who have not completed their first four years of academic study before the beginning of the taxable year. The credit cannot be claimed in more than four tax years for any one student. www.irs.gov
Deduction for student-loan interest
Up to $2,500 in student-loan interest may be deducted above the line as long as the debt was incurred to pay the college costs for yourself, your spouse or your dependent, while enrolled as a student at least half time in a degree program. A student claimed as a dependent may not take the deduction on his or her own return. www.irs.gov
Lifetime Learning Credit
A taxpayer may claim a tax credit for 20 percent of up to $10,000 in combined tuition and mandatory fees for himself, his spouse and his dependent children. This equates to a $2,000 tax credit. Claiming the American Opportunity credit described above means that you may not claim a Lifetime Learning Credit for any of that student’s expenses in the same tax year. There is no requirement that the student be studying toward a degree or be enrolled at least half time, and there is no limit on the number of years the credit may be taken. For more information, visit www.irs.gov.
Tax-free education assistance
Employers may pay and deduct up to $5,250 in college and graduate-school costs for each employee under a Section 127 educational assistance plan. The education does not have to be job-related. The benefit is tax-free to the employee but cannot be used to pay for an employee’s children or other family members. For more information on tax incentives for education, see IRS Publication 970, Tax Benefits for Higher Education, available at www.irs.gov.
Tuition and fee deduction
A tax deduction up to $4,000 for tuition and fees from taxable income is available if you or anyone who claims you as a dependent submits an American Opportunity, Hope or Lifetime Learning Credit in the same year. Details and additional information are available at www.irs.gov.