With all the worries about rising college costs, lower- and moderate-income families should keep in mind that there are federal tax benefits that can help ease the financial burden of getting an education.
For instance, there are two tax credits available that can lower your tax bill while you, or your child, are in school. The American Opportunity Tax Credit lets you reduce your tax bill by up to $2,500 per student for the first four years of higher education. The credit can be used for either undergraduate or postgraduate educational costs. Eligible expenses include tuition, fees, books and equipment. To get the full credit, a single taxpayer can’t make more than $80,000 in 2014, according to the financial aid siteEdvisors.com; partial credits are available for income up to $90,000.
The credit is partly refundable — meaning that in some cases, even if you don’t owe any taxes, you can receive up to $1,000 back as a refund. Gary Carpenter, an accountant and executive director of the National College Advocacy Group, a nonprofit organization that helps families plan for college, recalls that one of his clients, a single mother with two children in school, received a $2,000 tax refund thanks to the credit.
There is also the Lifetime Learning Tax Credit, which offers a tax reduction of up to $2,000 per return (rather than per student). Income limits are lower than with the opportunity tax credit; the lifetime credit phases out between $54,000 and $64,000 for a single taxpayer for 2014. Unlike the opportunity tax credit, however, the lifetime credit is available even if your program of study doesn’t lead to a degree, and there is no limit on the number of years it can be claimed.
Karla Dennis, chief executive of Cohesive Tax in Cypress, Calif., said the lifetime learning credit was a boon for people seeking to update their skills or retrain for a new career: “I make a lot of my clients aware of it.”
Often, this credit is taken by graduate students who are ineligible for the opportunity credit, because they have been in school longer than four years, said Mark Kantrowitz, publisher of Edvisors.
If you’re eligible for both credits, you must choose one or the other. In general, Mr. Kantrowitz said, if you qualify for either, the terms of the opportunity credit are more generous, so “that’s the one you should pursue.”
If you borrowed money to attend college, the interest paid on both federal and private student debt is deductible on your federal tax return. You can reduce your taxable income by up to $2,500, if you meet the income requirements. Single filers can earn up to $65,000 this year and take the full deduction; if you make between $65,000 and $80,000, you can take a partial deduction.
You don’t have to itemize deductions on your tax return to claim thestudent loan interest deduction, so you can claim it in addition to the standard deduction.
There’s also no limit on the number of years that you can take the interest deduction. “As long as you’ve got the interest, you can deduct it,” Mr. Carpenter said.
As always with taxes, the impact of taking a deduction or credit varies, depending on your specific situation, so you may want to consult a professional tax adviser.
Here are some questions about education tax benefits:
■ How do I know how much interest I paid on my student loans?
Your servicer — the company that manages your student loans — typically reports the amount to you (and to the Internal Revenue Service) each year on Form 1098-E.
■ Is there a tax deduction available for college expenses?
A deduction of up to $4,000 for tuition, fees and other expenses expired on Dec. 31, 2013, according to the Internal Revenue Service website: “Under current law, the deduction is not available for tax years after 2013.” That means it’s no longer available, unless Congress acts to extend it. That’s not necessarily a big loss, said Mr. Carpenter; many people may be better off taking one of the available credits anyway.
■ How do I claim an education tax credit?
File I.R.S. Form 8863 with your federal tax return.
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