College is expensive, but several educational tax benefits can help U.S. students offset the cost of college by reducing their or their parents’ Federal tax obligations. Many American families, however, aren’t aware these programs exist. In fact, the U.S. Government Accounting Office estimates that 14 million eligible families miss out each year. Here are three key benefits to be aware of as your child plans for college.
Lifetime Learning Credit: The Lifetime Learning Credit allows American families to claim a tax credit of up to $2000 on the first $10,000 spent on qualified educational expenses. Qualifying educational expenses include tuition, required fees, and course-related books, equipment and supplies. Expenses for room, board, transportation, or personal expenses are not included. There is no limit on the number of years this credit can be claimed, but it cannot be combined with the American Opportunity Tax Credit in the same tax year. Who’s eligible in 2014: Families with a modified Adjusted Gross Income of up to $108,000 if married and filing jointly; up to $54,000 for single, head of household or widowed taxpayers.
American Opportunity Tax Credit: The American Opportunity Tax Credit allows parents to claim a tax credit for 100 percent of the first $2,000 and 25% of the next $2000 (or up to $2500 total) for tuition, fees and required course materials paid for students enrolled at least half-time in college. Expenses for room, board, transportation and personal expenses are not included. Up to $1,000 of the credit is refundable, even if you owe no Federal income tax. There is a limit of four years of credit per student, and it cannot be claimed in the same year as a Lifetime Learning Credit or the Tuition/Fees deduction. The American Opportunity Tax Credit is scheduled to be phased out in December, 2017 but may be extended by Congress. Who’s eligible in 2014: Families with a modified Adjusted Gross Income of up to $160,000 if married and filing jointly, or up to $80,000 for single, head of household, or widowed taxpayers.
Student Loan Interest Deduction: This tax benefit allows taxpayers to deduct up to $2500 in interest payments on Federal and private student loans used to pay educational expenses. The taxpayer claiming the deduction must be legally obligated to pay the loan. Therefore, a parent cannot claim it if they’re paying off a student loan taken by the student, but they can claim it if the parent has taken a parent PLUS loan or a loan specifically for educational expenses for the student. On the flip side, students may claim the deduction for student loan payments only if their parents are no longer claiming the student as a dependent for tax purposes. The deduction may not be claimed in the same tax year as the American Opportunity Tax Credit or Lifetime Learning Credit. Who’s eligible in 2014: Families with an Adjusted Gross Income of up to $125,000 if married and filing jointly, or up to $60,000 for single, head of household or widowed taxpayers. By Congressional mandate, the income eligibility levels will decrease by $5,000 in 2015, and each year after that until the deduction is phased out completely.
In addition to these three educational tax benefits, parents and students may be eligible for a host of other educational tax benefits. Families should investigate all available options, and consult with a tax consultant to decide on the most beneficial combination of educational tax benefits.
Learn more at the IRS, Tax Benefits for Education Information Center, www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center.
