College costs are a significant expense to parents and students. Tuition, room and board, books and fees can bring the price tag to tens of thousands of dollars. Fortunately, the IRS offers several tax benefits to ease the burden of secondary education costs.
Students or parents use a variety of resources to cover tuition costs, ranging from 529 plans, retirement savings, out-of-pocket income, scholarships and grants, and federal or private student loans.
Tax Credits vs. Tax Deductions
Depending on the payment method – and which college expenses the funds cover -- Americans may be eligible for certain tax 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.
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.
Tuition and Fees Deduction. Depending on their tax situation, individuals may choose to instead take this deduction. It allows them to write off $4,000 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.
Lifetime Learning Credit. This 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.
Several rules govern 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.