Tax Breaks for College - COLLEGEdata - Pay Your Way

Tax Breaks for College

Many taxpayers leave money on the table by overlooking these valuable education tax breaks.

It's no secret that paying for a college education can be one of the biggest budget headaches for families and students. Fortunately, these tax breaks help you keep more of your money for college.

Determining Which Tax Break to Use

There are two tax credits and two deductions related to higher education expenses: You can take either the American Opportunity credit or the Lifetime Learning credit, which deduct education expenses from your tax. The student loan interest deduction (which can be taken along with either of the credits) and the tuition and fees deduction (which can't) reduce your taxable income.

Each of these tax breaks has its own rules for eligibility, which can change from year to year. Your best bet is to review these rules annually. The following information is based on the 2015 tax year.

The American Opportunity Credit

Amount of credit: 100 percent of the first $2,000 spent on qualified education expenses and 25 percent of the next $2,000. The maximum credit per student per year is $2,500.

College years covered: The first four undergraduate years of college.

Income limits: Single filers making less than $80,000 and joint filers making less than $160,000 may take up to a $2,500 credit. A reduced credit is available to single filers making $80,000–$90,000 and joint filers making $160,000–$180,000.

Qualified expenses: Tuition, required fees, and required course materials, including textbooks and computers. Student must be enrolled in a recognized degree or credential program.

Attendance: Student must attend an eligible institution at least half-time during the tax year.

Other: If the credit is greater than the tax owed, up to $1,000 of the excess may be refunded.

The Lifetime Learning Credit

Amount of credit: Up to $2,000 per tax return (20 percent of the first $10,000 of qualified education expenses paid for eligible students).

College years covered: All college years, including postgraduate.

Income limits: Single filers making less than $55,000 and joint filers making less than $110,000 may take a credit up to $2,000. A reduced credit is available for single filers making $55,000–$65,000 and joint filers making $110,000–$130,000.

Qualified expenses: Tuition, fees, and required course materials for one or more courses to acquire or improve job skills.

Attendance: Enrollment by a family member in a college or vocational course during the tax year. Your family includes the taxpayer, the taxpayer's spouse, and the taxpayer's dependents.

The Student Loan Interest Deduction

Amount of the deduction: A maximum $2,500.

College years covered: All college years, including postgraduate education.

Income limits: Single filers making less than $65,000 and joint filers making less than $130,000 may take a deduction up to $2,500. A reduced deduction is available to single filers making $65,000–$80,000 and joint filers making $130,000–$160,000.

Qualified expenses: The loan must have been used solely to pay for tuition and required fees, required books and equipment, transportation, and room and board. Expenses paid by a loan received from a person related to you or from a qualified employer plan are not eligible.

Attendance: Student must attend an eligible institution at least half-time during the tax year.

Other: You can take the deduction for every year you pay required or voluntary interest on the loan until the loan is paid. Only the person legally obligated to repay the education loan may take the interest deduction. You cannot deduct loan interest that is eligible to be deducted under a different tax rule. For example, if you use a home equity loan to pay for qualified education expenses, the interest is deductible as mortgage interest but not as education loan interest.

Tuition and Fees Deduction

Amount of the deduction: A maximum $4,000.

College years covered: All college years, including postgraduate education.

Income limits: Single filers making less than $65,000 and joint filers making less than $130,000 may take a deduction up to $4,000. A $2,000 deduction is available to single filers making $65,000–$80,000 and joint filers making $130,000–$160,000.

Qualified expenses: Tuition, fees, books and supplies, and other expenses required for enrollment or attendance at an eligible educational institution. Room and board do not qualify.

Attendance: Student must attend an eligible institution at least half-time during the tax year.

Other: You may not claim the deduction if your filing status is married filing separately, or if you are claiming an education credit for the same student.

What's Next?

Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.