Would you turn down $2,000 of free money? No?
Sadly, in 2009, over 1.5 million families DID turn down this free money by neglecting to take advantage of the education tax breaks that they were entitled to. As reported in The Chronicle of Higher Education, the lost savings in unclaimed education tax breaks in 2009 (the most recent year for which information is available) totaled $726 million representing an average loss of $466 per family. Over the course of a 4-year education, this average yearly loss equates to a family turning down nearly $2,000!
As we sit in the heart of tax season, College Coach’s college admissions counseling team strives to help families take advantage of these important tax breaks.
There are four main education tax credits and deductions that parents of college students may be eligible for.
These education tax breaks include:
- American Opportunity Credit (AOC): If you are paying for the undergraduate tuition, enrollment fees, and course materials for a dependent child that is at least a half-time student within the first 4 years of their postsecondary education, the most valuable education tax credit to you is likely the American Opportunity Credit. The AOC provides a credit equaling 100% of the first $2,000 in tuition and related fees paid for the student and 25% of the next $2,000, for a maximum credit of $2,500 per year for parents paying at least $4,000. Though you can claim only one education tax credit/deduction per child, if you are paying the college expenses of more than one child, you can claim the AOC for multiple students. Eligibility for the AOC phases out between $80,000 and $90,000 of income for single taxpayers, and between $160,000 and $180,000 of income for parents married filing jointly.
- Lifetime Learning Credit (LLC): Parents of graduate students, part-time students, and students on the 5-year undergraduate plan (i.e. have already used up 4 years’ worth of AOC) may be eligible for the Lifetime Learning Credit. The LLC provides an education tax credit equaling 20% of the first $10,000 of eligible expenses paid for a student, for a maximum credit of $2,000. Eligibility for the LLC phases out between $52,000 and $62,000 of income for single taxpayers, and between $104,000 and $124,000 for parents married filing jointly.
- Tuition and Fees Deduction: If your income is too high to qualify for the Lifetime Learning Credit, yet the enrollment status of your child (less than half-time, graduate student, etc.) disqualifies you from the American Opportunity Credit, you may benefit from the Tuition and Fees Deduction. This tax break allows you to deduct up to $4,000 in tuition and fees paid from your taxable income, your net benefit dependent upon your tax bracket. Single taxpayers with incomes less than $65,000 and married taxpayers with incomes less than $130,000 are eligible for the maximum deduction. Single taxpayers with incomes between $65,000 and $80,000 and married taxpayers with incomes between $130,000 and $160,000 are eligible for a lesser deduction. No deduction is available at higher incomes.Student Loan Interest Deduction: If you are currently paying down a loan borrowed for your child’s educational expenses, you may be eligible to deduct the interest paid this year from your taxable income, up to a maximum deduction of $2,500. Eligibility for this deduction phases out at AGIs between $60,000 and $75,000 for single taxpayers, and AGIs between $125,000 and $155,000 for parents married filing jointly.
As you can see, a number of education tax credits and deductions are readily available to middle-income parents of college students, as long as they claim the student as a dependent on their tax return. To ignore these tax breaks would be like turning down free scholarship money! And though the focus of this post has been parents, if you are a student paying for your own education, you can take advantage of these tax breaks too, so what are you waiting for? April 15th will be here before you know it!