This article was last edited on July 19th, 2017. For updated information on college credits and deductions, visit College Students: Are You Getting Your Education Tax Credits?
Affording college can be a burden on students and their families, and most students need every penny they can get. Fortunately, valuable tax breaks and credits are available for students and their parents to offset some of the costs of tuition and related expenses. Here are some credits and deductions that can help college students at tax time.
Are You A Dependent?
The first thing you must figure out is whether you qualify as a dependent on your parents’ tax return. To be considered a dependent, you must be a U.S. citizen or a resident of the U.S., and a full-time student under the age of 24. You also must receive at least half of your financial support from the family member claiming you as a dependent, and if you’re married, you must file a separate tax return from your spouse.
For many college students, being claimed as a dependent on their parents’ tax return is an ideal situation, since they probably will not be able to make as much use of the tax breaks as their parents can unless they make a considerable amount of income.
Is your college scholarship taxable?
If you receive a scholarship, the tax law allows you to take that money without paying tax on it as long as you use it for qualifying education expenses, which include tuition, fees, and required books, equipment and other supplies.
If your scholarship covers room and board, however, it is not exempt from taxation, which means that you will have taxable income and could have to pay income tax on the amount used for ineligible expenses.
Also, work-study programs and other jobs while you’re in school generally don’t qualify for tax-free treatment. Even if you use the money for tuition or other eligible expenses, you’ll still have to include it on your tax return.
Learn more about taxable scholarships here.
Credits, Deductions, and Other Tax Breaks You Make Be Eligible For
The American Opportunity Credit
The American Opportunity Credit is available for your first four years of college education and offers a break of up to $2,500 on the first $4,000 you spend on annual educational costs. The credit pays 100 percent of your eligible expenses up to $2,000, and then adds another 25 percent for the next $2,000 in costs, to make your maximum annual credit amount $2,500.
To qualify, you need to be enrolled at least half-time in a degree or certificate program. The credit is fully available for single filers with $80,000 or less in adjusted gross income, or for joint filers with $160,000 or less in AGI.
The Lifetime Learning Credit
For those who are not eligible for the American Opportunity Credit, the Lifetime Learning Credit also offers valuable benefits. The Lifetime Learning Credit offers a break of 20 percent on up to $10,000 in eligible expenses every year, giving you a credit of as much as $2,000 annually.
You cannot claim both credits in the same year, but you can use the American Opportunity Credit for the maximum period available (4 years) and then use the Lifetime Learning Credit to cover graduate school or further educational needs. The full credit is available to single filers making less than $52,000 in AGI, or $104,000 for joint filers.
Student Loan Interest Deduction
Once you start having to pay back any student loans you have, you can deduct as much as $2,500 in interest against your taxable income. These deductions may not be as valuable as credits, as they merely reduce your taxable income rather than directly cutting your tax liability. However, the deduction can save you hundreds on your taxes if you qualify.