Tax credit For College Students are an excellent method to reduce the cost of attending college by substantially diminishing the tax liability. Additionally, you have the ability to utilize tax deductions to decrease your taxable income and, consequently, your tax liability. Furthermore, you can benefit from additional tax advantages by establishing a 529 account for your college expenses.
Capitalizing on these tax benefits constitutes a highly effective strategy for enhancing the affordability of higher education. When implemented in a timely manner, the optimization of tax benefits via deductions and credits can yield substantial long-term savings. Numerous tax advantages are also available to those who save for college through a 529 plan.
What Are Tax Credits for College?
A variety of federal tax benefits are intended to assist families in saving for college expenses. The aforementioned encompass tax credits in addition to various tax deductions. The fundamental distinction between tax deductions and tax credits is that credits are deducted from the tax liability, as opposed to decreasing the taxable income.
Tax credits are thus even more advantageous than tax deductions, as the entire amount can be deducted from the amount of tax owed. The American Opportunity Tax Credit and the Lifetime Learning Credit are the two primary college tax credits. You may be eligible to deduct college expenses for yourself or your child using alternative tax credits, such as the Earned Income Tax Credit, contingent upon your specific circumstances.
What Are Tax Deductions for College?
Tax deductions are an additional type of tax incentive provided by the federal government with the aim of promoting college savings. By reducing your taxable income with deductions, you are exempt from paying tax on the entire amount of your income.
While not as advantageous as tax credits, tax deductions can substantially diminish the overall tax liability, allowing for the possible allocation of that cash towards education savings or another worthy purpose. In addition, reducing your tax liability through the use of tax deductions will result in a decrease in your adjusted gross income, which may grant you eligibility for additional tax deductions and credits.
Tax Credits for College Students
The American Opportunity Tax Credit and the Lifetime Learning Credit are the two college-specific tax credits that are accessible to both students and parents. Both must be claimed using the information on Form 1098-T, which your school will provide to the student, and Form 8863.
Keep in mind, however, that you may only claim one of these tax credits per tax year and not both.Additionally, the earned income tax credit might be applicable to college expenses. Regarding each of these tax credits, their eligibility and limits will be examined.
1. Opportunity Tax Credit for Americans
The American Opportunity Tax Credit (AOTC) is applicable to the initial $2000 of college expenses and tuition at a rate of 100%. Additionally, you are eligible to deduct 25% of the subsequent $2000 in tuition and associated costs, with an annual maximum of $2500. It should be noted that expenses that qualify are restricted to tuition, required fees, and course materials.
Non-required expenses or fees, including but not limited to room and board, insurance, and medical care, are not eligible for credit. Higher-income earners are ineligible for this means-tested tax credit: the AOTC is phased out for married taxpayers filing jointly who earn between $160,000 and $180,000 per year and for singles with incomes between $80,000 and $90,000.
Students are required to attend a degree program for a minimum of half-time in order to qualify. Furthermore, the credit cannot be claimed by the same student in more than four tax years, and students cannot have completed four years of academic study prior to the beginning of the taxable year.
Eligible taxpayers are additionally eligible to receive a refund of up to 40% of the credit. To qualify, one must have reached the age of majority beyond the “kiddie tax” threshold of 18 years, or 24 years for full-time students. Even if you have no tax liability following your application for the AOTC credit, you may be eligible for a maximum $1,000 refund.
2. Credit for Lifetime Learning
Taxpayers are eligible to claim a credit for tuition and mandatory fees associated with their higher education through the Lifetime Learning Credit. The tax credit is granted in the amount of 20% of tuition and mandatory fees paid, with an annual maximum of $2000.
The LLC is eliminated for single taxpayers with incomes between $59,000 and $69,000 beginning in 2022, and for married taxpayers filing jointly with a combined income between $118,000 and $138,000. Bear in mind that the Lifetime Learning Credit and the AOTC are mutually exclusive; you may only deduct one of the student’s expenses during the same tax year.
The LLC has the following disadvantages in comparison to the AOTC:
- Annual limit of $2000, rather than $2500 for the AOTC
- Only 20% of expenses can be claimed, instead of 100% for the first $2000 with the AOTC
- It’s nonrefundable
However, the Lifetime Learning Credit offers greater flexibility as it does not impose any restrictions on the student’s enrollment status (although the AOTC does mandate a minimum of half-time enrollment). Furthermore, there is no maximum number of years for which this tax credit can be utilized. This renders the LLC a favorable alternative for individuals who are enrolled in career development courses, pursuing a degree at a pace below half-time, or have surpassed four years of academic pursuit.
3. Credit for Earned Income Tax
While not education-specific, the earned income tax credit (EITC) may be utilized to offset college expenses. The credit is accessible to individuals with low incomes, and eligibility requirements differ based on factors such as marital status, number of dependent children claimed on the return, and income. To determine your eligibility, utilize the EITC Assistant provided by the IRS.
Without meeting this criterion, numerous pupils will be unable to obtain the credit if they are designated as dependents on the return of another individual. However, recent graduates without children and with a modest income may be eligible to reduce their tax liability by utilizing this credit.
The annual maximum credit is $6660, and it is refundable, meaning that you may be eligible for a refund even if the credit completely eliminates your tax liability. Form 1040 is required in order to claim the EITC.
College Tax Deductions for Students
There are several methods by which you can deduct tertiary education-related expenses on your tax return, including general education expenses and college tuition tax deductions.
1. Fees and Tuition Deduction
In the past, parents and students could deduct college tuition, fees, and other education-related expenses in excess of the line, with the intention of reducing their adjusted gross income (AGI) for tax purposes. Nevertheless, this deduction was formally eliminated in 2021, thereby limiting its applicability to the tax year 2020 only.
2. Deduction for Student Loan Interest
Interest paid on student loans utilized for one’s own college expenses, as well as those of one’s spouse or dependents, may be deductible while the student is registered in a degree program for a minimum of half a semester. An annual deduction of no more than $2,500 is permissible.
Similar to numerous tax incentives, this particular deduction becomes non-applicable for individuals with incomes between $70,000 and $85,000 when filing individually, and for married taxpayers filing jointly in 2022, between $145,000 and $175,000. You are not eligible to claim the deduction on your own tax return if it is claimed by your parent or guardian in their capacity as your dependent. In essence, this deduction is limited to a single claim.
SOURCE: Saving For College
