College costs represent a significant expense to parents and students, and once tuition, room and board, books and fees are factored in, the final price tag can reach tens of thousands of dollars. However, the IRS offers several tax benefits to help ease the burden of secondary education costs, but the extent of these credits and deductions may depend on how individuals cover their college costs.
There are a variety of resources students or parents use to cover tuition costs, ranging from tax-favored 529 plans, retirement savings, out-of-pocket income, scholarships and grants and federal or private student loans. Depending on the payment method - and which college expenses the funds cover - Americans may be eligible for certain credits and deductions. When researching payment strategies and factoring in tax benefits, most experts encourage families to take credits over deductions, which accounts for a dollar-to-dollar reduction in taxes.
For example, the American Opportunity Credit provides an annual credit of $2,500 per student for the costs of tuition, fees and course materials. The benefit is available to households with a modified adjusted gross income of $80,000 or less for single filers or $160,000 or less for married filers filing jointly. The credit amounts will be phased out for individuals whose income exceeds these thresholds. The credit can be claimed for the first four years of an individual's post-secondary education.
Depending on their tax situation, individuals may choose to instead take a tuition and fees deduction. The benefit allows them to write off $4,000 if their income if their income falls below $65,000 for single filers and $130,000 for joint filers. Single filers with income between $65,000 and $80,000 or married joint filers with an income between $130,000 and $160,000 can deduct $2,000 in tuition and fees. In addition, taxpayers do not have to itemize in order to claim the benefit.
The Lifetime Learning Credit can also lower a household's tax burden and can be used to cover the costs of undergraduate or graduate education or those who choose to take one class at a time. Taxpayers can claim up to $2,000 per return for qualified education costs, including tuition, fees and course-related supplies and equipment.
There are several rules governing scholarships, grants, tax-favored savings plans and qualified expenses, so it's important to consult a tax preparer
and provide the relevant tax forms when claiming deductions or credits.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
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