Last week, we talked about tax strategies you can use to offset some of the costs of your child's education. This week, we'll go over the credits and deductions offered for higher learning, like college and trade school.
First, the difference between a credit and a deduction....
A tax credit lowers your tax bill dollar for dollar. A tax deduction reduces your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are. The difference is important because there are several options available when it comes to your taxes and college education expenses.
Tax Credits Available for College
The American Opportunity Credit
The American Opportunity Credit replaced the Hope Credit in 2009. This credit is available to parents & students for college expenses. The maximum annual credit is $2,500 and can be used up to four years per student. There are income restrictions - full credit is available for those who make less than 80,000 single/$160,000 married. The credit phases out for those an income above those levels. This credit expires December 2017. This credit is also refundable up to 40% - meaning if you have little or no tax liability you could receive a refund of up to $1,000!
The Lifetime Learning Credit
The Lifetime Learning Credit is a federal tax credit for qualified education expenses paid during the tax year for yourself, your spouse, or a dependent. The credit applies to full-time or part-time post-secondary education, including undergraduate, graduate, and professional study.
The credit equals 20% of the first $10,000 that you paid for all family members, up to a maximum of $2000 per year per family. The credit is not refundable, meaning that you will not get a refund payment if your credit is more than what you owe in taxes.
Tax Deductions Available for College
Student Loan Interest Deduction
The student loan interest deduction allows you to deduct from your taxable income the amount of interest you paid during the year for a qualified student loan for yourself, your spouse, or a dependent. The student loan must have been used to pay for qualified education expenses such as tuition and fees, room and board, and books and supplies.
The amount of interest you are allowed to deduct will depend on your income, with a maximum allowed deduction of $2500. You cannot take the full student loan interest deduction if your income is $60,000 single/ $120,000 married or the partial deduction if your income is $75,000 single/$150,000 married. You also can not take this deduction if you claimed either the American Opportunity Credit or the Lifetime Learning Credit. However, you can take the deduction even if you do not itemize your deductions.
Tuition and Fees Deduction
The tuition and fees deduction allows you to deduct from your taxable income the amount you paid for qualified tuition and fees for yourself, your spouse, or a dependent. The amount of the deduction depends on your income, with a maximum allowed deduction of $4000.
You cannot take the full student loan interest deduction if your income is $65,000 single/ $130,000 married or the partial deduction if your income is $80,000 single/$160,000 married. Like the Student Loan Interest Deductions, you also can not take this deduction if you claimed either the American Opportunity Credit or the Lifetime Learning Credit. However, you can take the deduction even if you do not itemize your deductions.
Business Deduction for Work-Related Education
The business deduction for work-related education is a tax deduction for employees and self-employed business owners who paid qualifying education expenses during the year. You can claim the business deduction for work-related education if you are working, you itemize your deductions, and your education expenses meet the requirements to be qualified
For your expenses to be qualified, your work-related education must be required to keep your present salary, status, or job; or must maintain or improve the skills you currently need for your job, must serve a business purpose for your employer. The also cannot be part of a program that qualifies you for a new trade or business or be needed to meet the minimum requirements of your present job.
Work-related education expenses include tuition and fees, books and supplies, lab fees, certain transportation costs, and other education expenses.
As you can see there are many opportunities available to save money on your federal income tax when it comes to paying for child's (or yours!) college education. If you'd like more information on whether your qualify for these credits or deductions, please give us a call!
