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Tax Deductible College Expenses and Other Credits You Should Know About

deductible college expenses

According to one study, families who make over $100,000 can’t afford over half of U.S. colleges. That’s a tall order, considering the median household income is about $63,000. College has become a tremendous expense for even those in the upper echelons of the middle class.

So just about every college student needs all the help they can get. Federal tax credits and deductions are available for savvy students — if they know where to find them. These can lead to a respectable sum of thousands of dollars in annual savings.

Alleviate the burden of college costs for either yourself or your family. Here are some deductible college expenses that every student should know.

Qualified Education Expenses

In 2018, sweeping tax reform removed the provision that made tuition and other education fees tax-deductible. However, a tuition tax deduction is still available through two higher-education tax credits. But not everyone will qualify.

American Opportunity Credit

The best-known education tax deduction is the American Opportunity Credit. You’ll receive an immediate tax write-off of $2,000 if you spend that much in college expenses during the year. And the fact of the matter is you’ll spend far more than that even if you’re attending a community college.

After the first $2,000, you’ll also receive a tax deduction on a quarter of the following $2,000. In total, the American Opportunity Credit will save you $2,500 when it’s time to file taxes. Even if you didn’t earn income to pay taxes, you’ll receive a $1,000 refund.

Note that the American Opportunity Credit covers tuition fees, books, and essential equipment. Room and board and transportation costs aren’t included. If you know how to use financial aid, this can help make up the difference.

Do you qualify for the American Opportunity Credit? You must be at least a half-time student, still enrolled in an undergraduate college, and the claiming taxpayer must make less than $160,000 jointly or $80,000 as a single-filer.

Your institution will give you Form 1098-T at the end of the year to help you claim this credit. Input this information in your 1040, along with Form 8863.

Lifetime Learning Credit

In general, the Lifetime Learning Credit (LLC) is about as potent as the American Opportunity Credit. It’s also much more flexible.

You can claim a tax deduction on 20% of up to $10,000 in annual college expenses. The LLC covers the same expenses as the American Opportunity Credit, which means you can’t receive a deduction for living or transportation expenses.

In total, the LLC can save you $2,000 every year, compared to $2,500 with the other credit option. There’s also no refund with the LLC, so it will only help you if you make a decent amount of income during the year.

This makes it ideal for older individuals who have already completed undergraduate courses. Unlike the American Opportunity Credit, you can claim the LLC even if you’re in graduate courses or at a vocational institution. This is, after all, why it’s called the Lifetime Learning Credit.

To receive the LLC, you must make less than $57,000 as a single-filer or $114,000 jointly. Beyond this, you’ll receive reduced compensation or won’t be able to claim it at all.

Claiming your LLC is the same as claiming the American Opportunity Credit: Get your hands on the 1098-T, and include the information in Form 1040 and Form 8863.

Student Loan Interest Deduction

Although there are fewer tuition deduction opportunities, the savings don’t disappear once you graduate. You’ll start receiving a tax deduction every year once you start paying off your student loans.

Specifically, you’ll be able to lower your taxable income by the amount of interest you pay on your student loans, up to $2,500.

This is available to anyone who makes less than $65,000. Those who make more can receive reduced benefits or no benefits after $80,000. To claim this credit, the loan also has to be in your name.

But you should know that deductions work differently than tax credits. Since a deduction reduces your taxable income, it’s less effective than a credit which is a full tax write-off.

Let’s look at an example of how much you stand to save.

If you received the full $2,500 from the American Opportunity Credit, you’ll save the entire amount so long as you owe at least $2,500 in taxes for the year.

This differs from the full $2,500 student loan interest deduction. This lowers your taxable income. You save only on a percentage of the taxes you would have paid for this amount.

Assuming you’re in the 15% tax bracket, the $2,500 student loan deduction will save you approximately $375. It’s notable, but only a fraction of the savings that a tax credit offers.

529 Savings Plan

If you’re not yet in college, you may be taking advantage of a 529 educational savings account to pay for it later on. Contributions to these accounts are not federally deductible. More than half of states do offer tax benefits for 529 contributions.

Look at your state’s government website for special 529 tax incentives. In some cases, you can use your 529 savings account to make tuition payments, reducing the taxes you’ll owe at the end of the year.

Tax-Free Textbooks

About two-dozen states exempt textbooks from sales tax. This means you can save around 10% on the cost of your college textbooks. There are, however, certain exceptions to where and how you’ll enjoy this tax relief.

Confused about textbook taxes? This article can help you navigate differences between the states.

Profit From Deductible College Expenses

Most college students are eligible for either the American Opportunity Credit or the Lifetime Learning Credit. In addition to smaller savings from standard deduction payments and sales-tax relief, you could save thousands of dollars from deductible college expenses.

Want to know another way to save? Buy textbooks online with our price comparison tool. We’ll help you find the storefront offering the textbooks you need at the lowest cost.

About the Author

Christopher Manns

I was born in the UK, grew up in Canada and have lived in the USA since the 90s. I love my family, water sports, ice hockey, skiing and soccer. When I'm not helping people save money on textbooks, I'm travelling with my wonderful family and playing sports.