Investing in your education is important even though tuition costs keep climbing. College tuition, fees, and room and board average $42,419 at private institutions and $18,943 at public institutions, according to College Board.
While it can be difficult to keep higher education costs down, there are plenty of tax benefits to be gleaned.
Here are 4 college and education tax related benefits every student should be utilizing:
During college I was able to benefit a lot from education related deductions. On behalf of yourself, your spouse or your dependent, you may be able to deduct qualified education expenses paid during the school year. This deduction can reduce the amount of your income that is subjected to tax by up to $4,000 if you're single and can't be claimed as a dependent.
If you graduate college with student loans and your modified adjusted gross (MAG) income is less than $75,000 (if filing single) or $150,000 (if filing jointly), you may receive special a special deduction. You can get student loan interest deducted from your taxes.
Education tax credits can help reduce the amount of income tax you have to pay each year you're in school. If the credit reduces your tax to less than zero, you may actually get a refund. Hooray for tax refunds!
The American Opportunity Tax Credit (formerly known as the Hope scholarship credit), can be claimed in tax-years from 2009 through 2017. The credit applies to educational expenses including tuition, fees, course materials and more. Expenses related to room and board, transportation, insurance, and medical expenses don’t qualify unfortunately. But students can receive a tax credit up to $2,500. 40% of the credit is refundable. To learn more about this specific tax credit, visit IRS.gov.
The Lifetime Learning Credit is another tax credit that can be utilized school expenses while in attendance. The credit helps students pay for undergraduate, graduate and professional degree courses. The credit is limited to $2,000. However, it can be used for as many years as enrolled. To learn more about eligibility requirements for the Lifetime Learning Credit, click here.
Scholarships are great because even though they’re competitive, you don’t have to pay them back. A fellowship can also be earned. It's similar to a scholarship. But it’s paid to a student to pursue a certain type of research.
I earned quite a few various private and public scholarships during college. Sometimes I got worried that the money I desperately needed to pay for college was going to get taxed and counted as income. The best thing about scholarships and fellowships is that they can be tax-free if they meet the following conditions:
- You are pursuing a degree at an eligible institution.
- You use the scholarship or fellowship funds to pay for qualified educational expenses.
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To learn more about tax-free scholarship and fellowship requirements, check out this information from the IRS.
College Savings Plans
Qualified tuition programs, also known as 529 plans, are maintained by states. They allow you to either prepay tuition or contribute to a special savings account for future expenses. Either option is convenient. However, consider opportunity cost before you prepay for education. Earnings in a 529 plan are tax-free when invested and tax exempt when withdrawn for qualified higher education expenses. Qualified expenses include tuition, room and board, fees, books, supplies and materials.
State sponsored college savings plans are very popular for parents. While contributions are not deductible, there is also no income limit for contributors. This is an option everyone can consider.
Getting a head start on college prep is a great idea. No one enjoys last minute panic. Use one or many of these programs and your finances will thank you.
Higher education may always be pricey. But these tax benefits will definitely help. For further assistance, see our Ultimate Tax Guide and consult a tax professional.
How have you/how will you pay for college?
Originally posted 2015-10-14 10:00:25.