With income tax season well underway, college students and their families should brush up on available tax benefits that can help lower their education costs.
Families spend an average of $24,000 a year on college, but just over a third take advantage of federal tax credits and deductions to help make college more affordable, according to recent research from Sallie Mae.
These education tax benefits, which are based on criteria including the filer’s income, can help offset the cost of tuition, fees and related costs. (Credits reduce the tax owed, while deductions reduce the amount of income on which the tax is calculated.)
The benefits have varying rules and limitations, and deciding which one works best can be a challenge, said Michael Sonnenblick, a tax analyst with Thomson Reuters. But the tax savings can be meaningful, especially for families with more than one child in college, so it’s worth taking the time to see if you qualify.
The American Opportunity Tax Credit lets families reduce their tax bills by as much as $2,500 a student, for the first four years of higher education. To receive the full credit, a single taxpayer can have 2015 income of up to $80,000, Mr. Sonnenblick said. A partial credit is available for income up to $90,000. (The comparable income limits for married filers are $160,000 for the full credit and up to $180,000 for a partial credit.)
The credit is partly refundable, so even if you owe no taxes, you can get up to $1,000 back as a refund, if you qualify.
The Lifetime Learning Credit offers a credit of up to $2,000 a year, per taxpayer return (rather than per student). It can be used for any post-high school education, the course of study doesn’t have to lead to a degree, and there’s no limit on the number of years it can be claimed.
The credit is available to those with 2015 income of up to $65,000 for single filers, and $130,000 for joint filers (the credit is gradually reduced, however, for single filers making more than $55,000 and for joint filers making more than $110,000). Unlike the opportunity credit, the lifetime credit isn’t refundable.
If you don’t qualify for a credit, you may be able to use the deduction available for tuition and fees. You can take the deduction, even if you don’t itemize on your return. Single filers can deduct up to $4,000 if their income is $65,000 or less ($130,000 or less for joint filers). The deduction is $2,000 for single filers with income between $65,000 and $80,000, and for joint filers with income between $130,000 and $160,000. Filers with higher incomes aren’t eligible.
Families can’t take both the deduction and a credit in the same year, Mr. Sonnenblick said: “They don’t mix,” he said. “You can take a deduction or a credit, but you can’t take both.”
For more details on education credits and deductions, including eligible expenses, see I.R.S. Publication 970, Tax Benefits for Education.
Here are some answers to common questions about education tax benefits:
■ Can I claim both the American Opportunity Tax Credit and the Lifetime Learning Credit?
An individual student can claim just one of the tax credits in a given year. A family with two or more children, however, can claim different credits for different children, Mr. Sonnenblick said. “You can take them in the same year,” he said, “but not for the same student.”
One common approach is for a family to take the American Opportunity Tax Credit for four years when the student is an undergraduate, then switch to the Lifetime Learning Credit when the student goes to graduate school, said Betsy Mayotte, director of consumer outreach and compliance at American Student Assistance.
■ How can I tell if I’m eligible for the tax credits?
The Internal Revenue Service offers an interactive tax assistant tool on its website, which can help you see if you can claim the credits.
Figuring out which one is the best deal, however, can be tricky. You may want to calculate your tax return for each option using tax preparation software, or seek professional tax advice.
■ Can I deduct the interest I pay on my student loans?
If you borrowed money to attend college, you can deduct the interest paid on both federal and private student debt, even if you don’t itemize. You can reduce your taxable income for 2015 by up to $2,500, if you meet the income requirements. The deduction is available for single filers making up to $80,000, and married taxpayers with income up to $160,000.
If you paid more than $600 in student loan interest, you’ll receive Form 1098-E showing how much you paid.