Paying for college can be expensive. However there are several tax benefits students and parents can use to help with their expenses for higher education.
Please note: CCAC does not provide tax advice and not all students will be eligible for all benefits.
A tax credit reduces the amount of income tax you may have to pay.
American Opportunity Credit
The American opportunity tax credit includes expenses for course-related books, supplies and equipment that are not necessarily paid to the educational institution. It is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, 40% of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax.
The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.
Lifetime Learning Credit
The lifetime learning credit helps parents and students pay for post-secondary education. For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. You cannot claim both the Hope or American opportunity credit and lifetime learning credits for the same student in one year.
A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
Tuition and Fees Deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.
Student Loan Interest Deduction
If your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
Business Deduction for Work-Related Education
If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.
Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses.
Coverdell Education Savings Account
This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses.
You may exclude certain educational assistance benefits from your income.
You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.