With colleges across the country opening their campuses for a fresh new set of students, it’s the perfect time to consider the tax savings your family can take advantage of this tax season. While every family’s economic situation differs, several tax credits and deductions are available to most families with college-bound kids.
Continue reading to learn the tax-saving tips your family can use this year to save on college-related expenses come tax time.
Tax-Saving Credits For College-Bound Kids
As the parent or guardian to a first-time college student, you know how much paperwork and filing goes into assuring the child in your life is set up for success. Many families get so bogged down by the overwhelm of it all that they don’t take advantage of several tax-saving options.
One of the easiest ways to save money on your taxes this year is by carefully considering tax credit options for eligible students and their families. The two most common tax credits your family can leverage to save money this tax season are the American Opportunity Tax Credit and the Lifetime Learning Credit.
American Opportunity Credit (AOTC)
The American Opportunity Credit helps college-bound families pay for education expenses in the first four years of post-high school schooling. Although subject to income limitations and strict requirements, your family could receive a maximum annual credit of $2,500 per eligible student. Additionally, your family could receive up to a 40% refund if you owe no tax at the end of the year.
To claim AOTC on your tax return, make sure you and the student in your family check these boxes:
- The student is you, your spouse, or a dependent listed on the tax return.
- Must be pursuing a degree or credential.
- Have qualified education expenses, including tuition, books, and equipment from an eligible. institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
- Be enrolled at least part-time for at least one academic period beginning in the tax year.
- Not have finished the first four years of post-high school education at the beginning of the tax year.
- Not have claimed the AOTC for more than four tax years.
- Not have a felony drug conviction at the end of the tax year.
- Modified adjusted gross income (MAGI) is $90,000 or less (or $180,000 for married filing jointly).
If your family meets these requirements and is qualified to apply for the AOTC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is another great tax-saving opportunity for families wanting to offset the cost of tuition and education expenses for the student in their life. Although subject to income limitations and other requirements, your family could receive a maximum annual credit of $2,000 per tax return.
Unlike the AOTC, the LLC has no limit on the years you can claim the credit and has less stringent eligibility requirements. Be aware you cannot claim both the LLC and AOT in the same tax year.
To apply for the LLC, make sure the student in your life meets these requirements:
- The student must be yourself, your spouse, or a dependent listed on your tax return.
- Have qualified education expenses, including tuition, books, and equipment from an eligible institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
- Be taking higher education course(s) to get a degree, credential, or improve job skills.
- Be enrolled for at least one academic period beginning in the tax year.
- Modified adjusted gross income (MAGI) is between $59,000 and $69,000 (or $118,000 and $138,000 for joint returns).
If your family meets these requirements, and are qualified to apply for the LLC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.
Tax-Saving Deductions For College-Bound Kids
As college tuition and related education fees increase, more and more students and their families must take on student loans. According to recent census data, around 13.5% of Americans have some form of student loan debt. And while this debt is a financial burden, there are some ways to save money during tax season.
The two most common tax deductions your family can leverage to save money on tuition and related college expenses this tax season are the Student Loan Interest Deduction and the 529 Plan Contributions.
Student Loan Interest Deduction
Your family or the student in your life can take advantage of up to a $2,500 tax deduction. Including required and voluntary pre-paid interest payments, the deduction can either be up to $2,500 or the amount of interest you paid during the tax year, whichever is less.
To claim the student loan interest deduction, the following requirements must be met:
- You paid student loan interest during the tax year.
- The loan holder is legally obligated to pay interest on a qualified student loan.
- Tax filing status is married filing jointly.
- Modified adjusted gross income (MAGI) is less than the annual limit.
- If filing jointly, neither spouse can be claimed as a dependent on someone else’s return.
If your family and the student in your life meet these requirements, and are qualified to apply for the student loan interest deduction, make the deductions directly on Form 1040.
529 Plan Contributions
Operated by the state or an educational institution, 529 plans allow your family to save for college and other higher education. Any earnings in the 529 plan are exempt from federal taxes and are often exempt from state taxes when you use the funds for qualified education expenses.
Although 529 plans are not tax deductible at the federal level, many states offer deductions or special tax credits for these types of contributions. Check out this site for a list of states that offer deductions or tax credits and the corresponding deduction or credit.
Regardless of deductions or credits available in your state, investing in a 529 plan remains an advantageous way to grow education-related savings tax-free.
If you have any questions about 529 plans or how your family can leverage tax credits or deductions on your next tax filing, book a consultation call with us. We’ll walk you through all your tax-saving options and ensure you never pay more than you have to.