Jan 3, 2017

7 Tax Breaks for College Costs


My son started college last year. Do I qualify for the American Opportunity Tax Credit, and how much is it worth?

The American Opportunity Tax Credit is worth up to $2,500 per student for each of the first four years of college. The student must be enrolled at least half-time for one academic period during the year in a program leading to a degree, certificate or other recognized educational credential.

To qualify for the full credit, your adjusted gross income must be less than $80,000 if you are single or filing as head of household, or less than $160,000 if you are married filing jointly. The size of the credit starts to phase out as your income rises, disappearing entirely for singles and heads of household earning more than $90,000, and for couples filing jointly earning more than $180,000. Money spent on tuition, fees and books (but not room and board) counts toward the credit.

The credit is worth 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000, totaling $2,500 for each of the four years. You can claim the credit by filing IRS Form 8863 with your Form 1040. Also see IRS Publication 970, Tax Benefits for Education for details.

Can I get a tax break if I’m taking some grad school classes? I’m only taking a few classes each semester.

Yes, if you meet the income criteria and are taking the class at an eligible school. The Lifetime Learning Credit is much more flexible than the American Opportunity Tax Credit. There is no limit to the number of years you can claim the credit, and the course must either be part of a postsecondary degree program or be taken to acquire or improve job skills. The course must be offered by an eligible educational institution, such as any college, university, vocational school or other postsecondary educational institution eligible to participate in the U.S. Department of Education student aid program.

The Lifetime Learning Credit is worth 20% of the first $10,000 of tuition, for a maximum of $2,000 per tax return. To qualify for the full credit for 2014, your income must have been less than $54,000 if single or filing as head of household, or less than $108,000 if you’re married filing jointly. The credit phases out entirely for singles and heads of household who earned more than $64,000 and for joint filers who earned more than $128,000.

You claim this credit by filing IRS Form 8863 with your 1040. For more information about the rules, see IRS Publication 970, Tax Benefits for Education.

Is it too late to contribute to a 529 college-savings plan and take a tax deduction for 2014?

It depends on the state. Most states that offer income-tax breaks for 529 contributions require you to make your contribution by year-end for that year’s break. But Georgia, Mississippi, Oklahoma, Oregon, South Carolina and Wisconsin give you until April 15, 2015, to contribute and still take the tax deduction for 2014. For each state’s rules, see www.savingforcollege.com.

What do I need to do to qualify for the student-loan tax deduction?

Up to $2,500 in student-loan interest can be tax-deductible for 2014 if your modified adjusted gross income is less than $65,000 if you’re single or less than $130,000 if married filing jointly. The deduction phases out as your income rises, disappearing completely if you earn more than $80,000 if single or more than $160,000 if filing a joint return.

You do not have to itemize your deductions to qualify, but you can’t be claimed as a dependent on your parents’ tax return. You may even be able to deduct the interest your parents paid on a loan for which you are liable. For more information, see IRS Publication 970, Tax Benefits for Education

Can I cash out savings bonds tax-free for my son’s college costs?

If you redeem I bonds and EE bonds issued after 1989 to pay college tuition, you may not have to pay taxes on the interest you earned. To qualify for the tax break, the bond owner must use the money to pay qualified education expenses (tuition and required fees, but not room and board) for himself, his spouse or a dependent. The bond owner must have been at least 24 years old when the bond was issued. That means the bonds must generally be owned by the parent, not the child. The child can be a beneficiary of the bonds but can’t be a co-owner.

For the interest to be tax-free, you must also meet certain income criteria. For 2015, the exclusion is phased out completely if your income is $145,750 or more for joint returns and $92,200 or more for single and head of household returns. (For 2014, the exclusion is phased out if your income is $143,950 or more for joint returns or $91,000 for single and head of household returns.) For all of the interest to be tax-free, your modified adjusted gross income must be less than $115,750 for joint returns and less than $77,200 for single and head of household returns (for 2014, the limits are $113,950 for joint returns and $76,000 for other returns). For more information, see TreasuryDirect’s Using Savings Bonds for Education factsheet.

Can grandparents get a tax deduction for 529 college-savings plan contributions?

It depends on the rules in the state where they pay taxes. About two-thirds of the states that offer state income-tax deductions for 529 contributions let you claim a deduction if you are a resident of that state, even if you don’t own the account – whether you’re a parent, grandparent, other relative or friend. The remaining states let you deduct contributions only if you’re the account owner. In that case, you might want to open a separate account for your grandchild so you can qualify for the deduction, even if the parents already have an account for the child. There’s no limit to the number of 529 accounts that can be opened for one beneficiary. For more information about each state’s rules, see savingforcollege.com.

My daughter received a college scholarship. Is the money taxable?

It depends on how much she received and what the scholarship covers. Scholarships are tax-free up to the cost of tuition and course-related expenses, such as books and supplies. Money for anything else not required for enrollment, including housing and travel, is taxed as income. And any scholarship money received as payment for services, such as teaching or assisting in a lab, may be taxed.

For more information about tax breaks for college costs, see IRS Publication 970, Tax Benefits for Education.


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Kimberly Lankford, Kiplinger

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