Besides scholarships (tax-free up to the cost of tuition and course-related expenses, such as books and supplies), there are several tax breaks designed to ease the effects of college costs, whether you’re saving to send your kids to college, paying for yourself, or considering some graduate work. The following 5 tips can help you take advantage of college tuition tax breaks available to you.
1. The Student Loan Interest Deduction
Student loan interest is interest you paid during the year on a qualified student loan. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions on Form 1040, Schedule A, Itemized Deductions.
You can claim the deduction if all of the following apply:
• You paid interest on a qualified student loan in tax year 2016;
• You’re legally obligated to pay interest on a qualified student loan;
• Your filing status isn’t married filing separately;
• Your MAGI is less than a specified amount which is set annually; and
• You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
• For you, your spouse, or a person who was your dependent when you took out the loan;
• For education provided during an academic period for an eligible student; and
• Paid or incurred within a reasonable period of time before or after you took out the loan.
If you paid $600 or more of interest on a qualified student loan during the year, you’ll receive a Form 1098-E, Student Loan Interest Statement, from the entity to which you paid the student loan interest.
2. 529 Savings Plans
529 plans let your earnings escape federal tax completely if the withdrawals are used for qualified college expenses, including tuition, fees, and room and board. Two-thirds of states give residents a tax deduction or another tax break for contributions. You are may invest in other states’ 529 plans, although to get the tax break, you’ll usually need to invest in your home state.
The attractiveness of 529 plans lies in their easy access as well as the tax benefits the provide. The plans set no income limit and have a high limit on contributions. If your kid skips college, you can change the beneficiary to a sibling or other relative without losing the tax break. But make sure to use the money for non-college expenses or you’ll be on the hook for taxes and a penalty on earnings.
3. The American Opportunity Tax Credit
The American Opportunity Tax Credit is worth up to $2,500 per student for each of the first 4 years of college. A student must be enrolled at least half-time for one academic period during the year in a program leading to a degree, certificate or other recognized educational credential.To qualify for full credit, your adjusted gross income must be less than $80,000 if you are single or filing as head of household, or less than $160,000 if you are married filing jointly. The size of the credit begins to phase out as your income rises, disappearing entirely for singles and heads of household earning more than $90,000, and for couples filing jointly earning more than $180,000. Money spent on tuition, fees and books (but not room and board) does count toward the credit. Read More