College tuition and taxes: What you need to know
While college tuition and fees may break the bank, there is a silver lining. In many cases, at least some of the tuition, fees and even expenses for dorm rooms and supplies can offer tax savings. If you are a student or parent with an eye toward maximizing your tax deductions, you'll want to learn more about tax incentives for education expenses and student loan payments.
There are three main sources of tax savings on college expenses: tax credits, tax deductions and savings plans benefits.
If you pay higher education expenses for yourself, your spouse or a dependent, you may qualify for an education tax credit, which can reduce the amount of federal income tax you owe.
Consider these two options:
• The American Opportunity Tax Credit allows you to claim a maximum annual credit of $2,500 per student for qualified expenses paid during the first four years of college.
• The Lifetime Learning Credit lets you claim a credit of up to $2,000 per year for undergraduate, graduate and professional students, for an unlimited number of years.
Higher education expenses can also help reduce your taxable income. Here are a few tax deductions that you may qualify for:
• A tuition and fees deduction can reduce your taxable income by up to $4,000, and you won't have to itemize your tax return to claim this deduction. Consult with a MilTax professional to see if you are eligible.
• A student loan interest deduction allows you to deduct up to $2,500 of the interest you've paid on qualified student loans. You won't have to itemize your tax return to receive this deduction either, and you may qualify for it as long as your modified adjusted gross income is less than $75,000 (or $155,000 if you file a joint return).
• A business deduction for work-related education lets you claim a deduction for work-related education expenses if they are more than two percent of your adjusted gross income. A MilTax consultant can help you itemize your taxes and meet other requirements set by the Internal Revenue Service to qualify for this deduction.
College savings plans
• If you're using a savings plan to save for college, your plan may offer additional tax benefits:
• 529 plan contributions are not deductible on your federal tax return, but earnings and distributions from the money you save in a 529 plan are tax-free, as long as you use the funds for qualified higher education expenses.
• Coverdell Education Savings Account contributions are not tax-deductible, either. But you can grow your Coverdell savings tax-free as long as you contribute no more than $2,000 per student each year. You can also make tax-free distributions if the amount you withdraw doesn't exceed your student's qualified education expenses for the year.
• If you would like more information, reach out to a MilTax consultant, visit the IRS's Tax Benefits for Education Information Center, or contact a qualified tax professional.