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If you have a college student, you are allowed to deduct qualified education expenses on your income taxes. You can reduce the amount of taxes you owe by the amount of education credits for which you qualify. With college costs rising, this tax savings is a welcome benefit for families with one or more students in college.
If this is your first year with a student in college, you may have some questions. The IRS provides step by step information but here’s a quick Q&A that will help you understand how the deduction works.
To qualify for an education tax credit, you must make less than $80,000 as an individual or less than $160,000 as a married couple. Married couples filing separately cannot claim the deduction. You must also have an eligible student attending an eligible institution and pay qualified education expenses.
An eligible student is one who attends an eligible institution of higher learning, is enrolled at least half-time and pays qualified expenses. An eligible institution is any college offering higher education beyond high school: a college, university or vocational school. This includes most accredited public, nonprofit and for-profit institutions. If you aren’t sure if the school is eligible ask or see if the school is listed on the U.S. Federal Student Aid Code List.
There are two college-related tax credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. The AOTC credit is $2,500 per year per eligible child. The Lifetime Learning Credit is there to help part-time and graduate students in the amount of $2,000. There is also a tuition and fees deduction in the amount of $4,000 you may claim. Choose the education benefit that gives you the greatest tax savings.
Additionally, if the amount of the AOTC is more than the tax you owe, 40 percent of the credit up to $1,000 may be refundable.
You can claim tuition and required fees, books, supplies and equipment needed for a course of study. You cannot use room and board, transportation, insurance and medical expenses when determining your credit.
If you have any questions, you can read the Qualified Education Expense explanation from the IRS for more information.
You can only claim one exemption per child per tax year. You must choose between taking the education tax credit or the tuition and fees deduction. Parents should compare the tax savings of each option and determine which is best for your family. The IRS provides a simple comparison chart that might help.
You are allowed to claim a tuition and fees deduction for qualified education expenses if you paid with the proceeds of a loan. Figure the expenses based on the date the loan proceeds were paid to the college, not the year in which the loan is repaid.
You cannot claim credit for education expenses that are paid by a tax-free scholarship. You can, however, claim any excess expenses above the amount of the scholarship.
You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. There is, however, an income limit to this deduction. Read this article for more information: "Student Loan Interest Deduction — What You Need to Know."
Interest on the earnings from these college savings plans is not taxable if you use this money to pay for higher education. However, the money you withdraw from these plans to pay for college is not eligible for the education tax credit. If the amount you paid for your student’s qualified higher education expenses in 2016 exceeds the contribution from your savings plan, you are allowed to claim a credit for the difference.
Your child can claim the credit on his or her tax return if you do not claim the child as a dependent. Before making this choice, however, the IRS recommends you speak with a tax professional to maximize your tax savings.
The college or educational institution is required to file a 1098-T (Tuition Statement) with the IRS and provide you with a copy of this form. You can usually go online at the college website in your student’s account and download a copy. If you are not able to or do not receive a copy in the mail, contact the school. The IRS uses the figures on this form to verify your qualified education expenses.
The AOTC was due to expire in 2017, but the Protecting Americans Against Tax Hikes (PATH) Act of 2015 made the AOTC permanent. The PATH Act also made computers, iPads and tablets a qualified expense under 529 college savings plan rules.
Along with these changes, beginning with 2016 returns, the PATH Act also added some penalties for filing fraudulent returns. If the IRS determines that an individual has intentionally disregarded the rules for claiming the American Opportunity Education Credit, they can bar them for two years from claiming these credits. The EIN of the institution is also required to be reported on the return; if missing, the IRS will reject the return.
If you still have questions, the IRS provides an interactive app to help you determine eligibility for an education tax credit deduction: Am I Eligible to Claim an Education Credit?
Every family's income and tax situation is unique so it is always a good idea to consult with a certified financial planner. As you work on taxes, don't forget to remind your college student to complete and submit the forms required to apply for or renew financial aid (the FAFSA, etc.). Learn all about it in "A financial aid update for college parents."