College Tax Breaks
College Tax Credits
For those financially planning for college, it is highly beneficial to be well versed in all of the college tax credits students can take advantage of. While obtaining a college education requires a huge investment in terms of both time and money, most people will agree that the initial investment more than pays off in the long run. In addition, individuals considering making this lifetime investment should be aware that there are many things they can do to lower the overall cost of higher education and lessen the financial burden of this investment. The federal government has many measures in place to ensure that everyone who is interested in higher education has the opportunity to obtain it. Many of these measures come in the form of college tax credits, which allow college students to receive tax breaks both while in school and after they graduate. One important thing to note about taking advantage of college tax credits is that couples who are legally married but filing separately are not eligible to file for the tax credits outlined on this page. Below is a guide to some of the main college tax credits available to those who are in school or have graduated from an institution of higher education.
The Tuition Deduction
One of the most basic college tax credits is the Tuition Deduction, which allows taxpayers to deduct the cost of all eligible expenses related to higher education, including general tuition, books, computers and other equipment, and even select student activity fees. Room and board cannot be included in this tax deduction. These deductions can be made on behalf of the student, the student’s spouse, or a financial dependent of the student. In 2010, the maximum Tuition and Fees deduction was $4,000. When calculating this deduction any tax-free scholarships, in addition to any awards or grants received by the student must be excluded.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a college tax credit created by president Obama with the goal of reducing the financial burden of attending college. This tax credit can erase up to $2,500 of what an individual owes in taxes, and works to counteract expenses incurred during a student’s first four years of education at qualified institutions. Since this is a tax credit rather than a deduction, individuals who take advantage of this credit are also eligible to receive a refund from the IRS of up to $1,000. Expenses which are covered under the AOTC include tuition, required equipment (computers or otherwise), books, and any student activity fees which are required by the institution upon enrollment. This credit can be claimed by the student themselves, a spouse, or a dependent.
Lifetime Learning Credit
This is a college tax credit which works to help with the cost of a post-secondary education, whether that be graduate school or even classes taken to gain specific job skills or sharpen a student’s knowledge in a career oriented subject. This college tax credit can be claimed even if a student is not enrolled in an institution at full-time status, and can also be claimed for an unlimited amount of time as long as the student still meets all other eligibility requirements. This credit reduces an individual’s taxes owed by 20% for the first $10,000 in qualified expenses.
Student Loan Interest Deduction
The government takes measures to assist with debts related to obtaining higher education by allowing individuals who are paying off student loans to deduct the interest of these student loans from their taxes. Similar to the tuition deduction, the student loan interest deduction is a direct deduction and does not need to be itemized. Up to $2,500 a year may be accounted for through this deduction. However, it is important to note that as an individual’s income level rises, this deduction is gradually phased out. It is also possible that after the 2012 tax year, a change may be made to this deduction which will make it applicable only for the first 60 months of student loan repayment.
While these are some of the most prominent college tax credits, there are many other tax credits college students can take advantage of. By taking the time to do a little research, students will find that it is well worth the time to be educated in the field of college tax credits provided by the federal government to help lower the financial impact of a higher education.
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