Are you helping your child or grandchild pay for college? If you contributed money toward educational costs in 2016, you could get a serious tax break on education expenses when you file your return.
To qualify, you must have supported a dependent under age 24 who was going to college full-time. You may be able to claim an education tax credit or deduction, as well as protect your money in tax-advantaged college savings accounts.
Here are four ways to claim higher education costs on your taxes and ease the burden of paying for college:
If you e-file with a service such as TurboTax or Jackson Hewitt, the firm should automatically check whether you qualify for the college tax credits.
1. Higher Education Tax Credits
There are two college tax credits you can potentially claim: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. You can only use one, so choose the tax credit that will save you the most money on your 2016 taxes.
Typically, the American Opportunity Tax Credit is the way to go. The AOTC reduces your tax bill by up to $2,500 per eligible student. You can claim it every year that your dependent is an undergraduate, for up to four years, and college expenses such as books and equipment, as well as tuition, qualify for the write-off. But you can’t claim the credit if your adjusted gross income was over $180,000 in 2016 and you’re married, filing jointly or if it was over $90,000 and you were single.
If you don’t qualify for the AOTC, you may still be eligible for the Lifetime Learning Credit. This credit could reduce your taxes by up to $2,000 on your return. You can claim it for an undergrad or a grad student under age 24. But your 2016 adjusted gross income must have been no more than $131,000 if you were married and filing jointly; up to $65,000 if you were single.
If you e-file your taxes with a service such as TurboTax or Jackson Hewitt, the firm should automatically check whether you qualify for these college credits. Then, the tax prep company will suggest which one will give you the better tax break. (Of course, technology isn’t foolproof, so double check you aren’t missing out.)
2. Tuition Deduction
If you don’t qualify for the AOTC or the Lifetime Learning Credit, you may still be eligible for educational tax deductions (a credit is a dollar-for-dollar tax reduction; a deduction lowers your taxable income).
One is the deduction of up to $4,000 for college tuition, books, equipment and fees. But you can’t claim this write-off if your 2016 adjusted gross income was over $160,000 and you were married and filing jointly or over $80,000 if you were single.
3. Student Loan Interest Deduction
Beyond educational expenses, you can also deduct interest paid on student loans disbursed in your name. If you took out a Parent PLUS loan to help pay for a child’s college expenses, for instance, you should look into this deduction.
To claim this deduction, your adjusted gross income in 2016 must have been less than $160,000 if you were married and filing jointly or below $80,000 if you were single.
Claiming the student loan interest deduction could reduce your income tax by up to $2,500; use a student loan interest deduction calculator to find out exactly how much you can claim. For instance, someone with a $70,000 income who paid $1,000 in student loan interest could deduct $667.
According to the Internal Revenue Service, you qualify for the deduction if “you are the person legally obligated to make interest payments.”
4. Tax-Free College Savings Accounts
Both 529 college savings plans and Coverdell Education Savings Accounts are tax-advantaged accounts that help parents and grandparents saving for college. While contributions are not tax-deductible for federal, earnings grow tax-free.
There are no income limits for setting up 529s and no limit to the amount you can put into one. But there can be gift tax consequences if you contribute more than $14,000 in any year.
The adjusted gross income limit for having a Coverdell is $220,000 for a joint 2016 return, $110,000 for someone who was single. And the maximum 2016 contributions to all Coverdells set up for the benefit of any one person is $2,000.
As long as you use your 529 or Coverdell to pay qualifying education expenses, you won’t need to pay federal income taxes when you withdraw the money. If, however, you use the funds for other purposes, you must pay income tax on them.
Next Avenue Editors Also Recommend:
If so, thank you. Your financial gift helps us fulfill our mission of being an essential source of news and information for older adults. Just as important, your contribution demonstrates that you believe in the value of our work. We have a lot of exciting things planned in 2020 and we need your help to make sure they happen.
Haven’t given yet? Please make a gift today and help us reach our end-of-year goal — any amount helps. Thank you.