skynesher / Getty Images
Commitment to Our Readers
The GOBankingRates editorial team is dedicated to delivering impartial reviews and insights. Utilizing data-driven assessments, our financial product evaluations remain uninfluenced by advertisers. You can learn more about our editorial guidelines and review methodology for our products and services.
20 Years
Helping You Live Richer
Trusted by
Millions of Readers
Is college tuition tax-deductible? Many students and families strive to find ways to ease the financial burden of higher education. While the direct deduction for tuition was phased out in 2020, several tax credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit, have emerged as vital options for reducing college-related expenses on your taxes. Gleaning a fundamental understanding of these credits can significantly help in maximizing potential tax savings.
Understanding Tax Credits for Education and Tuition Expenses
With the Tuition and Fees Deduction no longer available, taxpayers must now rely on credits. Two major credits remain available to help offset college costs:
American Opportunity Tax Credit (AOTC): A Closer Look
The American Opportunity Tax Credit (AOTC) provides up to $2,500 per student for eligible education expenses. Families can receive a credit for 100% of the first $2,000 and 25% of the next $2,000 in qualifying expenses. Notably, 40% of this credit is refundable, enabling a maximum refund of $1,000. For more insights into education savings, explore ways families save on college tuition.
To qualify, you must be pursuing a degree or other recognized educational credentials, enrolled at least half-time for one academic period, and be within the first four years of post-secondary education. Additionally, the credit cannot be claimed if there is a felony drug conviction on record during the year.
Lifetime Learning Credit: An Overview
The Lifetime Learning Credit helps individuals seeking further vocational training or continuing education. This credit is non-refundable but provides up to $2,000 annually, calculated as 20% of the first $10,000 spent on qualifying expenses. It is perfect for those pursuing undergraduate, graduate, or even professional degree courses.
Eligible candidates must enroll in at least one qualified course at an accredited institution for career advancement or skill enhancement. Factors contributing to eligibility include pursuit of a degree or a necessity to boost job-related skills.
Recognizing Deductible College Expense Categories
Though pursuing these credits, it’s crucial to understand which expenses qualify. Tax credits typically cover:
- Tuition and enrollment fees
- Necessary textbooks, resources, and supplies
- Specific prepaid educational expenses
On the contrary, certain expenditures like those covered by tax-free grants or scholarships are not deductible.
Thanks!
Non-Deductible Expenses Explained
It’s important to distinguish between deductibles and non-deductibles concerning education-related expenses. Here’s what can’t be deducted:
- Travel costs
- Accommodation fees
- Insurance premiums
- Healthcare-related costs and insurance
- Everyday living expenses
- Sports-related expenses
- Non-credit course fees, unless aimed at skill enhancement
If opting for the Lifetime Learning Credit, some expenses like sports fees might qualify if they lead to skill improvement for your career.
Guidance on Claiming Educational Tax Benefits
Claiming tax credits involves obtaining your IRS Form 1098-T, which your institution provides. It highlights your annual educational expenses, adjustments, and scholarships. Follow these steps to claim your credits:
Filing for the American Opportunity Tax Credit
Use IRS Form 8863 to claim this credit. Ensure you have information like qualifying educational expenses, personal income, and filing status. Using tax software simplifies the process with guided question prompts based on your 1098-T form information.
Filing for the Lifetime Learning Credit
Similarly, to apply for the Lifetime Learning Credit, make use of IRS Form 8863. Gather and input information about your education expenses, school details, and meet the eligibility criteria. Tax software can assist in calculating the applicable credits based on your academic financial data.
Tax Advantages for Supporting College-Bound Dependents
If you support a child’s higher education, tax credits can decrease your tax obligations. This applies if the child resides at home or is claimed as a dependent. You should file IRS Form 8863 for eligible expenses on their behalf. To do so, the student must be a qualified dependent under 24 who relies on you for more than half of their financial support.
Extra Education-Related Deductions
Consider other educational expenses like a 529 Plan or student loan interest:
529 Plans: State Tax Benefits
Contributions made to a 529 plan may provide state tax deductions, and account growth and withdrawals remain tax-free if used for qualified education expenses.
Student Loan Interest Deduction
Student loan interest payments offer opportunities for tax savings, allowing deductions of up to $2,500 on your taxable income. To qualify, certain criteria must be met regarding filing status and income thresholds.
Conclusion
Navigating the available tax benefits associated with college expenses can lead to substantial savings. Whether through tax credits or deductions, it’s worth exploring all avenues to lessen your tax burden. As tax codes frequently change, consulting a licensed tax professional is advised to make the most of these opportunities.
Our in-house research team and on-site financial experts work collaboratively to ensure accurate, neutral, and up-to-date content. Every statistical, quotation, and factual claim undergoes thorough fact-checking using reliable primary resources to confirm correctness. Learn about GOBankingRates’ processes and standards in our editorial policy.
Click Here For More Personal Finance tips and strategies
Discover more from Make Money Online and Work From Anywhere
Subscribe to get the latest posts sent to your email.
