The average cost of attending college this year was $22,261, leading many students to search high and low for ways to save, yet few recognize these tax breaks for college students as potentially huge money savers. Put the ramen noodles back on the shelf, because these tax breaks will put some of that hard-earned money back in your pocket.
1.) The American Opportunity Tax Credit
The American Opportunity Tax Credit puts cash right back in a student’s (or parent’s) pocket. This tax credit is only available for the first year’s tuition, but it provides 100% for the first $2000 spent and 25% for the next $2000 for $2500 total tax credit. Tax credits are especially useful because they reduce the taxes owed for the exact amount of the credit. If $3000 in taxes are owed and $2500 tax credit is used, that means the student would only owe $500 on their taxes. Students must be enrolled in school at least half-time, and make less than $80,000 to be eligible for the American Opportunity Tax Credit.
2.) The Lifetime Learning Credit
While the Lifetime Learning Credit provides students a smaller tax credit, it may be used for multiple years, and even into graduate school. The Lifetime Learning Credit is worth 20% tax credit for up to $10,000 tuition, for a maximum credit of $2,000. The Lifetime Learning Credit can be used for as long as a student is in school, and has no minimum requirement for enrolled hours. There is also a maximum income threshold of $52,000. The two tax credits may not be used together, but in most cases the American Opportunity Tax Credit will give students the most savings.
3.) Deductions for Student Tuition and Fees
Almost all students are eligible for tax deductions on their tuition and fees, up to $4,000. Tax deductions only reduce the amount of taxable income however, so that doesn’t represent a $4,000 credit towards the student’s taxes. For example, take a student who made $20,000 during the school year and applies for the maximum deduction. That student will pay taxes on $16,000 of income, meaning that if they are in the 25% tax bracket they will pay $4,000 in taxes instead of $5,000. Students and parents with incomes above the requirements for tax credits will likely still be able to apply deductions, which can be used for undergraduate and graduate school.