College Expenses: What Deductions are Available & Who Gets Them?

There are three major credits and deductions available to those with higher education costs.

1. Tuition and Fees Deduction
2. American Opportunity Credit
3. Lifetime Learner Credit

 

College is expensive, and these credit/deductions help relieve some of the burden for those with post-secondary education expenses. First, what expenses qualify toward the deductions?

Qualified expenses for all three include tuition and fees, course-related books, supplies, and equipment. Non-qualified expenses include room and board. It’s important to note that any qualified expenses are reduced by scholarships and employer and veteran’s assistance.

Each has various restrictions on who is eligible. It’s important to note that you can only take one deduction/credit per student in a given year, so getting this right is important. Let’s take a look.

 

1. Tuition and Fees Deduction

 

This deduction is usually easiest to qualify for. The deduction is available to those with qualified expenses at any accredited post-secondary education institution. Part-time enrollment qualifies. The deduction is a dollar for dollar deduction up to $4,000 for those who are single or head of household with Adjusted Gross Income less than $65,000 or married filing joint with adjusted gross income less than $130,000. The credit is reduced to a maximum of $2,000 for those who are single or head of household with Adjusted Gross Incomes between $65,001 and $80,000 or married filing joint $130,001 to $160,000. If you exceed these thresholds, the deduction is phased out entirely.

The deduction is not allowed for those who file as married filing separate. Also, it is not available for those who qualify as a dependent on another person’ return. This is true even if the dependent is paying the fees. Therefore, this deduction usually goes to the parents, regardless of who is paying.

Note that this is a deduction, and not a credit. There is a big difference here. Credits reduce your tax dollar for dollar. Deductions reduce your taxable income. So, let’s say you’re in the 22% tax bracket, for example. A $4,000 deduction will save you $880 in tax (22% of $4,000) while a $4,000 credit would save you $4,000.

 

2. American Opportunity Credit

 

This credit is a little harder to qualify for but is usually the most advantageous. It is for qualified expenses for those at a post-secondary institution who have not completed the first four years of post-secondary education (bachelor’s degree). The courses must also lead to a degree or recognized education credential. The maximum credit is $2,500 calculated as a dollar for dollar credit on the first $2,000 in qualified expenses and then a 25% credit for each dollar spent on the next $2,000 in qualified expenses.

This credit I reduced for those who are married filing joint and have Adjusted Gross Income between 160,000 and $180,000 and disallowed for those married filing joint with AGI above $180,000. Those who are single or head of household have a range between $80,000 and $90,000. Those married filing joint do not qualify.

Unlike the Tuition and Fees deduction, this credit follows the dependency. This means that regardless of who is paying, the parents will receive the credit if they claim the child, and the child will receive the credit if they go unclaimed. This is where tax planning can come into play to determine the best option. Note that this credit is per student, not per taxpayer. Thus, if a taxpayer has multiple children in college, it is possible to receive this credit for each child.

 

3. Lifetime Learner Credit

 

This credit is probably easiest of the three to qualify for, but usually the least advantageous. To qualify, a student must be enrolled in an undergraduate, graduate, professional degree, or program that improves job skills. There is also no limit on the number of years this credit can be claimed, unlike the other two which are limited to 4 per eligible student. Also, this is a per household credit, so a taxpayer can only take it once, regardless of how many in the household qualify.

The credit is equal to a maximum of $2,000 and is calculated as 20% of qualified expenses up to $10,000. The phase out limits are $116,000 to $136,000 for those who are married filing joint, and $58,000 to $68,000 for those who are single or head of household. Those who have Adjusted Gross Income within those ranges will receive a reduced credit, and those who exceed those ranges are not eligible. Those married filing separately are not eligible.