With tax returns due on April 15th, this seems to be a good time to discuss benefits that lower the true cost of your child’s college education. These tax benefits fall into two general types: credits and deductions.
Credits are applied dollar for dollar against the tax that families may owe. Credits can even result in a refund. Currently, the U.S. tax code provides for two educational credits. The American Opportunity Credit (which replaces the Hope credit) is available only for four years of post-secondary education. This provides a maximum credit of $2,500 per student for qualified educational expenses, and there are family income limits that apply. A Lifetime Learning Credit of $2,000 per student is good for any type of study with no time limit. Income limits do apply to this credit also, but any family member can claim this credit for qualified educational expenses.
Although they don’t have the money-saving value of tax credits, education-related deductions are also helpful when meeting college expenses. Deductions reduce the amount of your taxable income. Families may reduce their taxable income by as much as $4,000/ year to pay for tuition and fees at an eligible post-secondary institution. Families can also deduct up to $2,500 of the interest paid on student loans taken to meet educational expenses. Both of these deductions also carry income limits.
To learn how these education-related tax benefits apply to your individual family situation, please contact your accountant or financial advisor.
