Students have become dependent on debt as a means to finance their education, especially as costs for tuition and housing continue to creep higher each year. With student borrowing at an all-time high, it is important to help students recognize opportunities to lower the total cost of their college experience by imploring tactics that they may not be aware exist. One of the most commonly overlooked outlets to save on college expenses is the use of tax credits and deductions specifically designed to help those with hefty education costs. Here are three tax tips you can share with your students to help them offset some of the expenses accrued during their college career.
American Opportunity Credit
For undergraduate students in the process of earning a college degree, the American Opportunity Credit provides a fair amount of bang for its proverbial buck. The tax credit allows for 100% of education expenses up to a maximum of $2,000 to be credited back to the student’s tax liability for each year expenses are incurred while in school. Because most students have far more than $2,000 in expenses, however, the IRS also allows for an additional 25% of the next $2,000 to be applied toward tax liability, for a total credit of up to $2,500 each year for a maximum of four years. There are some restrictions that students should be made aware of, though.
Only expenses that are specifically qualified under IRS guidelines are allowed to be used for the credit, which can include tuition, supplies, activity fees that are required, special equipment for classes, and books; room and board, however, cannot be used for the credit. In addition to expense restrictions, students (or their parents) must be below income limits in order to utilize the credit—individuals filing single cannot make more than $90,000, while couples filing a joint return cannot exceed $180,000 if they want to reap the full extent of the American Opportunity Credit. Also, only undergraduate students in a structured degree program can take advantage of this tax break.
Despite some of its restrictions, as a refundable tax credit, not a deduction, students are able to receive its monetary benefit even if no taxes are owed in the year the credit is taken. This unique aspect makes the American Opportunity Credit one of the most valuable education tax breaks for students.
Lifetime Learning Credit
Another powerful money saving tool available to students during tax season is the Lifetime Learning Credit. This tax credit is meant to provide a reduction in the total cost of a college degree that is not already covered by the American Opportunity Credit, although both cannot be used together in the same year. It works similarly in that the credit may only be applied to qualified education expenses, but the Lifetime Learning Credit provides a benefit up to 20% of $10,000 in expenses. The greatest difference between the two education tax credits can be deduced from the name—the Lifetime Learning Credit can benefit students in all levels of their education, including graduate level programs and less structured paths to a degree.
Income limits apply to the Lifetime Learning Credit as well, with single filers capped at $62,000 of earnings and couples filing joint returns limited to $124,000. Additionally, this tax credit is nonrefundable, meaning that it will only offset an already present tax liability. However, unlike the American Opportunity Credit, the Lifetime Learning Credit can be claimed as many times as a student is eligible.
Student Loan Interest Deduction
For students currently pursuing a degree and simultaneously working to pay off their debt, the student loan interest deduction may be of benefit. Some education loans will accrue interest while deferred, but students who make some or all of those interest payments throughout the year are able to deduct that amount on their tax return, up to a maximum of $2,500. This can also be a cost-saving mechanism for students who are in full repayment upon graduation, and both required and voluntary interest payments may be used to toward the total deduction amount.
Ready to bring iGrad to your school? Schedule a demo
Like tax credits, the student loan interest deduction is subject to income limits—$75,000 for single filers and $150,000 for those filing joint returns. Students should understand that a deduction differs from a tax credit in that it is an adjustment to taxable income, not a direct reduction in taxes owed, but it can still make a significant difference in reducing education costs each year.
Despite rising education costs, students have powerful tools to help them combat expenses incurred throughout their college journey; however, they may be unaware of what is available to them as it relates to their taxes each year. Sharing this information can be an invaluable factor in keeping a student’s total education costs low and safeguarding them against taking on even more debt during their time at college.