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Tax Credits for Higher Education Expenses

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Two tax credits help offset the costs (tuition, fees, books, supplies, equipment) of college or career school by reducing the amount of your income tax:

  • The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential.

  • The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required for the course and had to be purchased from the school.

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Qualified Tuition Programs (QTPs; also known as 529 Plans)

A QTP/529 plan is established by a state or school so that you can either prepay or save up to pay education-related expenses. Once you’re in college or career school and you withdraw money from your account to pay your education expenses, the money you withdraw will not be taxed. Learn more about state 529 plans. To find out whether the college you plan to attend participates in a QTP, ask the financial aid or admissions staff.

Student Loan Interest Deduction

You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.

Lifetime Learning Credit

How it works: You can claim 20% of the first $10,000 you paid toward 2021 tuition and fees, for a maximum of $2,000. The lifetime learning credit doesn’t count living expenses or transportation as eligible expenses.

Who can claim it: The lifetime learning credit isn’t just for undergrads or their parents. The credit applies to undergraduate, graduate and non-degree or vocational students, and there’s no limit on the number of years you can claim it. So it’s ideal for graduate students or anyone taking classes to develop new skills, even if you already claimed the American opportunity tax credit on your taxes in the past. You can’t claim both the American opportunity credit and the lifetime learning credit in the same year.

What it’s worth: You can claim the credit if your MAGI was less than $59,000 ($118,000 if you filed jointly) last year. If your MAGI was between $59,000 and $69,000 ($118,000 to $138,000 if you filed jointly), you can get a reduced credit. You can’t get the credit if your MAGI was more than $69,000 ($138,000 if you’re married and filing jointly).

Apply for the American Opportunity Tax Credit.

The American Opportunity Tax Credit is even more generous, offering up to $2,500 per year per student, compared to the Lifetime Learning Credit cap of $2,000 per family.

One drawback: You can only claim it for four years per student, so no credit for graduate work.

The AOTC might pay you!

One more excellent perk of the American Opportunity Tax Credit: The $2,500 credit is refundable, meaning that if you owe less than $2,500 in taxes, you’ll get a refund in the amount of the difference.

If you’re eligible for the Lifetime Learning Credit and the American Opportunity Credit for the same student in the same year, you can only choose one credit, but not both.

Deduct your student loan interest.

Tens of millions of current college students and college graduates make student loan payments every month. Like mortgage interest, student loan interest is deductible (up to a limit of $2,500).

Even better, you can take the deduction even if you don’t itemize.

Get a refund for work-study.

Unlike other types of college financial aid (like grants and scholarships), the money you earn from a work-study job is considered taxable income.

But that’s not all bad.

The school will withhold income taxes from your paychecks. So when it’s time to file your taxes in April, you will likely get a refund.

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