College Expenses That Are Tax Deductible for Parents
College is incredibly expensive. So, unless you have extremely an extremely wealthy benefactor willing to foot the bill, your child got a full-ride scholarship, or you just won the lotto, then it's going to be quite a financial challenge that can make any grown man cry. Fortunately, there are some things that can help you pay for your child’s education – tax deductions and credits. Yes, you read that right. You can get tax breaks for higher education expenses. Below are options that may be available to you:
1. Tuition and Fees Deduction
Is college tuition tax deductible? According to the IRS, yes, it is! This type of deduction is taken as an adjustment to income. What does that mean? Well, for one, it means that you can lower the amount of your income that will be subject to tax by up to $4,000. Two, you don't have to itemize the deductions in Form 1040.
So, what college expenses are tax deductible for parents?
Aside from tuition, this deduction also covers any qualified higher education expenses that are required in order for you, your spouse, or your dependent to enroll or attend an eligible educational institution that offers scholarships. These may include student activity fees such as the one required from students for on-campus student organizations and activities.
However, there are requirements. You can only avail of this if you are a taxpayer with a modified adjusted gross income (MAGI) that is $80,000 or less if you are single or $160,000 or less if you are married and filing jointly. You also cannot obtain this deduction if you are married but filing separately or claimed as a dependent on someone else's return. More importantly, you cannot claim this tax benefit if you are already claiming a tax credit such as AOTC or the lifetime learning credit.
2. American Opportunity Tax Credit
Formerly known as the HOPE scholarship credit, the AOTC is a tax credit that is counted directly on the taxes you owe. What this means is that you can claim up to a $2,500 credit for any qualified expenses per year (for the first 4 years) for every college student you are supporting. You get dollar-for-dollar credit for the first $2000 of qualified expenses. Then, you get 25 percent credit for the next $2,000 of qualified expenses. If the credit reduces your tax amount to zero, then you can get 40 percent of any remaining credit refunded to you (maximum of $1,000). For AOTC, qualified education expenses include books, supplies, and equipment that the student needs for their course of study.
However, in order to qualify for this tax credit, you will need to have a MAGI of no more than $90,000 ($180,000 for joint filers). Also, the student must be pursuing a degree or other recognized educational credential, and you must not have a felony drug conviction at the end of the tax year.
3. Lifetime Learning Credit
The biggest advantage of this tax credit is that there is no limit to the number of years you can claim it. Plus, qualified education expenses can include sports, games, hobbies, or non-credit courses as long as it helps the student improve job skills. In short, you don’t need to be pursuing a degree to avail of this tax benefit.
So, what is the LLC? With this one, you can avail of up to a $2,000 tax credit for qualified expenses paid to an eligible educational institution. Take note that this is a non-refundable credit which means you are limited to the amount of tax you owe. Also, you need to have a MAGI of $66,000 or $132,000 if filing jointly. And unlike the AOTC, this is not on a per-student basis. If you are paying for college for more than one person, you may be better off getting an AOTC than an LLC. However, you cannot claim this tax credit if you already claimed the AOTC for the same student. What is allowed is this - you can get the AOTC for one student and use the LLC for another. That is, provided you meet all the requirements of both. Also, you cannot claim this credit if you are married and filing separately.
4. Student Loan Interest Deduction
Yes, all that interest you pay on your student loan may be good for something after all. You can actually deduct up to $2,500 from your taxable income based on the amount of interest you paid that year on a qualified student loan used for higher education. Since this is taken as an adjustment to income, you do not have to itemize the deductions to claim them. One of the best things about this tax deduction is that it covers not only tuition and fees, books, supplies, and equipment – it also covers room and board as well as other necessary expenses like transportation.
For the student loan to be qualified, it should have been taken out to pay for you, your spouse, or your dependent’s qualified education expenses. You should also have a MAGI of less than $80,000 or $160,000 if filing taxes jointly. In addition, you can only take the deduction if you are the one legally obligated to repay the loan. If you are claimed as a dependent on someone else’s tax return, you are also not eligible for this tax deduction.
5. Tax-Free Sales on College Textbooks
Parents can also get a small tax break when buying college textbooks for their kids. Some states such as Oregon do not have sales tax on any purchases. 21 states including Washington D.C. exempt college textbooks from sales tax. But there are caveats so make sure that you know the rules in your state before availing of this tax benefit. For example, in Arizona, you can only get exempt from sales tax if the textbook is required by the school.
6. Home-Equity Loan Interest Deduction
This tax deduction is similar to the student loan one. If you took out a home-equity loan or line of credit to pay for your kid’s college expenses, you could deduct the interest you paid on the debt (up to a $100,000 loan balance) from your taxable income.
