5 sweet tax breaks for students

Tax road sign

For most families, tax season is *almost* as fun as a root canal, but for those paying tuition bills, the possibility of owing more money to the government is likely to be nauseating. These tax breaks might save you a serious chunk of change when April 15th rolls around. Here are five potential tax breaks for students.

The American Opportunity Tax Credit

The mother of student tax incentives, this credit is available to students in their first four years of higher education, and it could knock up to $2,500 off of their tax obligation. To receive the full credit, independent students and guardians of dependent students must have adjusted gross incomes of $80,000 or below ($160,000 or below for joint filers) and will receive a dollar-for-dollar reduction for the first $2,000 spent on tuition, fees and course materials, followed by a 25 percent reduction on the next $2,000, according to the IRS.

"Getting a $2,500 tax credit is equivalent to getting a $2,500 grant," says Sandy Baum, a senior fellow at the Urban Institute and research professor of education policy at George Washington University. "... It's important to understand that [the credit] really does diminish the amount that it costs you to go to college in exactly the same way it would if it were a grant."

A double bonus, Baum adds, is that American Opportunity credit is partially refundable, meaning that students don't need to pay taxes in order to get a portion of the credit. Families with incomes low enough to skip filing a tax return may be eligible for up to $1,000 in free cash. A guide to whether you need to file a tax return is available on the IRS website.

Lifetime Learning Tax Credit

The American Opportunity credit can only be claimed for up to four years per student, but there's no limit on how long families can claim the Lifetime Learning Credit. The catch is that you'll have to spend more to get the full benefit. Unlike the American Opportunity credit, which provides a dollar-for-dollar tax match for the first $2,000 families spend, the Lifetime Learning incentive only provides a credit equivalent of 20 cents for every educational dollar families spend up to $10,000. That's a maximum tax credit of $2,000 annually for $10,000 spent on tuition fees and supplies. The income restrictions are also a bit different. The Lifetime Learning tax credit is available in full for single filers earning $53,000 or less ($107,000 for joint filers). Partial credit is available for single filers with incomes below $63,000 ($127,000 for married couples).

"[Tax credits] are a financial benefit, but you don't get it at the time your tuition bill is due," explains Karen McCarthy, a policy analyst for the National Association of Student Financial Aid Administrators. "You pay during the year and then the following year when you're filing your taxes, that's when you claim the tax credit. …The timing is a little bit out of sync."

The Lifetime Learning credit is nonrefundable, meaning that it's only available to those earning enough to file an income tax return.

Tuition and Fees Deduction

Deductions aren't generally as sweet as tax credits, but they can still help. Only available to families who don't claim either of the above credits, the full deduction of up to $4,000 is offered to individuals earning $65,000 or less ($130,000 or below for married filers). A partial deduction is available for single filers earning $80,000 or below ($160,000 for married couples).

Joseph Cunningham, an assistant professor of accounting at Albright College, is quick to point out that a deduction isn't the same as a credit.

"Tax deductions are a reduction of taxable income. For example, if a taxpayer was entitled to deduct $4,000 of these expenses, then their taxable income would be $4,000 less," he says. "A tax credit is a reduction of the taxes owed."

Before claiming a tuition and fees deduction, Cunningham recommends researching whether you qualify for a tax credit and then carefully comparing your options.

Student Loan Interest Deduction

If you're paying a student loan, you can also deduct up to $2,500 of your interest, even if you qualify for other education tax incentives.

"Most student loans made through commercial lenders are eligible for deductions, but there are limitations," Cunningham says. "If a [relative] made a loan to a student then the interest from that loan would not qualify."

Student loan interest deductions are only available for single filers earning below $75,000 ($155,000 for joint filers) and may include any funds paid as origination fees, interest on refinanced student loans and credit card interest if the debt was taken on solely for qualified education expenses. A list of those expenses is available on the IRS website.

529 Incentives

The federal government offers tax-free growth on funds in a 529 prepaid or college savings plan, but many states also offer their own incentives, though these differ quite a bit from state to state, says Karen McCarthy.

Alabama, for example, offers a deduction of up to $10,000 for joint filers, while Illinois offers a walloping $20,000 deduction for married couples annually. If you have a 529 plan and are unsure of whether your state offers a tax incentive, a simple call before tax time could help pad your wallet.

SOURCES:

FAQs, CollegeCounts Alabama's 529 Fund, CollegeCounts529.com,
http://www.collegecounts529.com/faqs.asp

American Opportunity Tax Credit, IRS.gov, Dec. 9, 2013,
http://www.irs.gov/uac/American-Opportunity-Tax-Credit

"Questions & Answers," American Opportunity Tax Credit, IRS.gov, Dec. 9, 2013,
http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers

"Do You Need to File a Federal Income Tax Return?", IRS.gov, Dec. 18, 2013,
http://www.irs.gov/Individuals/Do-You-Need-to-File-a-Federal-Income-Tax-Return%3F-

Lifetime Learning Credit, IRS.gov, Jan. 3, 2014,
http://www.irs.gov/Individuals/LLC

Tuition and Fees Deduction info, IRS.gov,
http://www.irs.gov/publications/p970/ch06.html

Student Loan Interest Deduction, IRS.gov,
http://www.irs.gov/publications/p970/ch04.html

"529 Plan Tax Incentives," Bright Start Section 529 Illinois savings program, BrightStartSavings.com,
https://www.brightstartsavings.com/OFI529/PN/generated/en_us/PrimaryNavigation_06-01-07-141719.xml

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