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Top Four College Tax Breaks: Do You Qualify?

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If you’re a parent paying for college, I bet you feel like you could sure use a break. Well, you’re in luck. You might qualify for a break directly from Uncle Sam—a tax break! There are a number of college tax breaks available, so, with the April 15 tax filing deadline just around the corner, be sure to take note of any credits, deductions, or exclusions that you may be eligible to claim. Below, we discuss the four most common college tax breaks:


529 Savings Plans

Withdrawals from 529 Savings Plans for eligible education expenses are totally tax-free. Eligible expenses include college tuition and required fees, room and board if the student is enrolled at least half-time, required books and supplies, special education services, a computer and peripheral equipment, and, since 2017, private elementary and secondary school tuition. Unlike most education tax benefits, there are no income limitations placed on the tax-free growth of 529 Plans.


TIP: Many states offer a state tax deduction when you contribute to a 529, so it may make sense to continue to contribute to your child’s 529 while they are enrolled in college, even if you will be withdrawing the funds very shortly in order to make a college payment. Simply passing college payments through your 529 may reduce your state taxable income, but be sure to check your state tax return instructions for any restrictions.


American Opportunity Credit

For most parents paying for college, the most valuable tax break will be the American Opportunity Credit, or AOC. This credit is available to offset the college costs of students attending college at least half-time in their first four years of undergraduate education. Parents can claim a credit for up to 100% of the first $2,000 of tuition, enrollment fees, and required course materials paid for their dependent child, and 25% of the next $2,000 in qualified expenses. It therefore works out that if you pay at least $4,000 in qualified college costs, you can claim a $2,500 tax credit, $1,000 of which is refundable. Eligibility for the AOC phases out between $160,000 and $180,000 of income for married parents who file a joint tax return and between $80,000 and$90,000 of income for single taxpayers.


TIP: The IRS does not let you double-dip and get two tax breaks for the same college payment, so even if you have enough in your 529 Plan to pay for one tax year’s tuition bill, you may want to hold a little back. Pay at least $4,000 from some other source, so that you can maximize both the AOC and tax-free 529 withdrawals.


Lifetime Learning Credit

While the American Opportunity Credit is the more valuable tax credit for most people, if your child’s enrollment status prevents you from claiming the AOC, take a look at the Lifetime Learning Credit, or LLC. The LLC allows you to take a credit for up to 20% of your first $10,000 of eligible educational expenses, for a maximum (nonrefundable) credit of $2,000. For 2018 tax returns, eligibility for the LLC phases out between $114,000 and $134,000 of income if married filing jointly and between $57,000 and $67,000 if single.


TIP: You can only claim one college tax credit—the American Opportunity Credit or the Lifetime Learning Credit—per student per tax year, not both. Most parents will find the AOC more valuable, as it has a higher maximum, higher income limits, and is partially refundable. The LLC will be most beneficial to parents of dependent graduate students, part-time students, and fifth year seniors, who are ineligible for the AOC.


Student Loan Interest Deduction

College loan borrowers may be able to deduct from their income the interest and origination fees paid on their loans, up to $2,500 per tax year. For the 2018 returns, eligibility for the Student Loan Interest Deduction phases out between $135,000 and $165,000 of income if married filing jointly and between $65,000 and $80,000 if single.


TIP: A taxpayer can only claim a deduction for interest paid on loans that he or she is legally responsible for repaying. That means that parents can claim the interest paid on Parent PLUS Loans or co-signed private loans, but only students can claim the interest paid on Subsidized or Unsubsidized Direct Loans, and only if their parents do not claim them as a dependents.


Paying for college is nearly always a challenge for parents, and may be more so for many parents this year, with tax reform’s elimination of exemptions for dependents. Parents of younger children will potentially see this elimination offset by a higher child tax credit, but the child tax credit only applies to children under 17. Parents of college-age children may be looking at otherwise high tax bills this year, so should be particularly cognizant of additional ways to offset this increased tax burden. Education tax breaks fit the bill (no pun intended) for this task, so take care to confirm eligibility requirements using IRS Publication 970: Tax Benefits for Education and claim any college tax breaks that you are eligible for.




About the author:

Shannon Vasconcelos is Director of College Finance at College Coach, the nation’s leading provider of education advising, where she delivers workshops and provides individual counseling on the college finance process. Before joining College Coach, Ms. Vasconcelos worked in financial aid at Boston University and Tufts University. She has a BA in Economics from the University of Massachusetts and an MA in Urban and Environmental Policy and Planning from Tufts University.


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