With the cost of higher education at an all-time high, students and parents need to take advantage of all available tax credits and deductions. These tax breaks can help offset the burden of tuition, books, and other education-related expenses. However, navigating the world of tax code and education can be overwhelming. That’s why we at Harding Bell International have put together a guide to help students and parents maximize their education tax credits and deductions.
Understand the Difference Between Tax Credits and Deductions
The first step in maximizing your education-related tax breaks is understanding the difference between tax credits and deductions. Both can help reduce your tax bill, but they work in different ways.
Tax credits directly reduce the amount of tax you owe, dollar for dollar. For example, if you owe $5,000 in taxes and have a $2,000 tax credit, your tax bill will now be $3,000. On the other hand, deductions reduce the amount of your income that is subject to taxes. So if you have a $2,000 deduction and fall into the 25 percent tax bracket, your tax bill will be reduced by $500.
Claim the American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is available for the first four years of undergraduate education. It is worth up to $2,500 per year, per eligible student. To be eligible, the student must be pursuing a degree or other recognized credential, enrolled at least half-time, and have not completed their fourth year of post-secondary education. The credit is also phased out for higher-income households.
Take Advantage of the Lifetime Learning Credit (LLC)
If you or your child are in their fifth year of post-secondary education or beyond, the LLC is a valuable tax credit to consider. It can be claimed for an unlimited number of years and is worth up to $2,000 per year, per tax return. However, the credit is non-refundable, meaning it can only reduce your tax liability to zero but will not result in a tax refund. The LLC also has lower income limitations compared to the AOTC.
Explore Education-Related Deductions
In addition to tax credits, there are also several deductions available for education-related expenses. These deductions include:
- Tuition and Fees Deduction: This allows you to deduct up to $4,000 of qualifying tuition and fees for higher education.
- Student Loan Interest Deduction: You can deduct up to $2,500 of interest paid on qualified student loans. This deduction is available even if you do not itemize your deductions.
- Educator Expenses Deduction: If you are a teacher or other education professional, you can deduct up to $300 of out-of-pocket expenses for books, supplies, and other materials used in the classroom.
Utilize Education Savings Plans
In addition to tax credits and deductions, education savings plans can also help reduce the cost of higher education. These plans, such as 529 plans and Coverdell Education Savings Accounts (ESAs), allow you to contribute after-tax dollars that can grow tax-free and be withdrawn tax-free when used for qualified education expenses.
Keep Good Records
When it comes to claiming education tax credits and deductions, it is important to keep good records. This includes keeping track of tuition bills, receipts for textbooks and other supplies, and proof of payment for student loan interest. Having these records on hand will make it easier to accurately claim any tax breaks for education-related expenses.
Stay Informed of Changing Tax Laws
Tax laws and regulations are constantly changing, so it is important to stay informed of any updates that may impact education tax credits and deductions. This includes changes to income eligibility limits, qualifying expenses, and the availability of certain tax credits or deductions.
Maximizing education tax credits and deductions is a valuable way for students and parents to reduce the cost of higher education. As always, it is recommended to consult with a tax professional on our team for personalized advice and assistance with tax planning.
