With college tuition on the rise, furthering your education won’t come cheap. According to College Board, in-state students paid an average of $9,410 to attend a public four-year college from 2015-2016. The good news is Uncle Sam offers education tax benefits that can make it easier on your wallet.
529 plans are a tax-friendly way to save for college. These plans are offered by state and educational institutions and come in two varieties; prepaid tuition and savings. Prepaid tuition plans give you the opportunity to secure today’s rates for future use. Alternatively, savings plans work by investing your contributions. 529 plans are attractive because not only does your money grow tax-free, your withdrawals won’t be taxed if it’s used to pay for education expenses.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is worth up to $2,500 for students who paid for college expenses during their first four years of post-secondary education. Qualified expenses include tuition, books and enrollment fees but not room and board. In addition to lowering your tax bill, the AOTC can also put some extra cash in your wallet. Up to $1,000 of the credit is refundable if your tax bill is reduced to zero. To qualify, your modified adjusted gross income cannot exceed $90,000 ($180,000 if married filing joint).
Lifetime Learning Credit (LLC)
Whether you’re pursuing a degree or just taking a few classes to improve your job skills, you may qualify for the Lifetime Learning Credit. This nonrefundable credit is worth up to $2,000 for students who paid for tuition and associated fees. Unlike the AOTC, there’s no limit on the number of years the credit can be claimed. To qualify, your modified adjusted gross income cannot exceed $65,000 ($130,000 if married filing joint). Please note, you can only claim one of the education credits on your tax return. When you use ezTaxReturn to do your taxes, we’ll help you choose the appropriate credit for your situation.
Tuition and Fees Deduction
The Tuition and Fees Deduction allows you to deduct up to $4,000 worth of education expenses from your taxable income. Qualified expenses include tuition, books, equipment and supplies. Your modified adjusted gross income must be $80,000 or less ($160,000 or less if married filing joint) to qualify.
Student Loan Interest Deduction
Writing the check for your student loan may not be something you look forward to but it does come with a tax perk. Up to $2,500 of your student loan interest may be deductible on your tax return. As long as your paid interest is $600 or more for the year, you’ll receive a Form 1098-E from your lender to file with your return. In order to take the deduction, your modified adjusted gross income must be less than $80,000 ($160,000 if married filing joint).