NEW YORK (MainStreet) — March is a gut-wrenching month for high school seniors waiting for college acceptances ... and for their parents awaiting financial aid awards. But another spring ritual plays into all this and can take the edge off: tax time.
Whether you have a child about to start college or one already there, be sure to look out for the tax benefits that can help trim the cost, substantially in some cases. There are four, but not every family is eligible.
“There are two education-related tax credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, as well as two deductions, one for student loan interest and the other for tuition and fees,” says Sallie Mae, the financial services firm that specializes in federally insured college loans.
Credits are worth the full amount allowed, so a $2,500 credit reduces taxes by $2,500. Deductions are figures subtracted from the taxpayer’s taxable income. A $4,000 deduction would therefore save a taxpayer in the 25 percent tax bracket $1,000.
The American Opportunity Tax Credit allows eligible families to claim up to $2,500 for expenses for tuition, fees and educational materials such as books. But there’s a catch: For the full amount, the taxpayer — parents or a student who is not a dependent — must have a modified adjusted gross income of less than $80,000 for a single taxpayer, or $160,000 for a married couple filing a joint return. Modified adjusted gross income is adjusted gross income, found on your tax return, with certain items added, such as deductions made earlier on the return for traditional IRA contributions and student loan interest paid.
“Again this year, low-income families who owe no tax may be eligible to receive a credit refund of up to $1,000 for each qualifying student,” Sallie Mae says.
The Lifetime Learning Credit can provide each taxpayer with up to $2,000 to offset tuition and fees. But to get the credit, MAGI must not exceed $52,000 for singles, $104,000 for joint filers.
The Student Loan Interest Deduction is, as the name suggests, a deduction of up to $2,500 for interest paid on qualified federal or private higher education loans. For a maximum deduction, MAGI must be less than $60,000 for singles, $125,000 for joint filers.
The tuition and fees deduction allows the taxpayer to reduce taxable income by up to $4,000 for tuition expenses and related fees. For the full deduction, MAGI must be less than $65,000 for singles, $130,000 for joint filers.
It’s a bit confusing with these different income limits, but that’s how Washington works. Don’t bother to look for logic. The calculations become a bit clearer once you start doing your return, so be sure to keep good records of all you pay.