Education Tax Benefits: 6 Tax Deductible Expenses

Tax Credits

We’re all looking for ways to save money. This is especially true when it comes to paying for college. Are you positive you're taking full advantage of all your available tax credits and deductions when it comes to college?

Make sure you’re not leaving money on the table by forgetting about these education tax benefits. Here are six deductions and credits you may not know about that can help you save big for college. For more information, reach out to your tax advisor for assistance.

1. American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) was formerly known as the HOPE credit before its establishment in 2009. This education tax benefit is designed to help lighten the load for Americans pursuing higher education.

With the AOTC, you could receive a credit for up to $2,500 per year for qualified education expenses you may have paid. These expenses include tuition, fees, books, and other supplies. The AOTC is specifically for your first four years of college. If you’ve already received your undergraduate degree then, unfortunately, you’re not eligible.

You also must be enrolled at least half time (usually around six credit hours) for at least one semester during the tax year you’re taking the credit. Even better is that the AOTC is available for each eligible student for whom you’ve paid higher education expenses. If you have two children in college at the same time, you can claim this credit for each student!

Be sure to note that just like you can only use the AOTC for your first four years of school, that also means you can’t claim the credit for more than four tax years. It’s also important to remember that you can’t take both the AOTC and another tax credit (like the Lifetime Learning Credit below). You have to choose one or the other. Also, with the AOTC, your modified adjusted gross income cannot be more than $90,000, or $180,000 if you’re filing jointly.

2. LifetimeLearning Tax Credit

The Lifetime Learning tax credit (or LLC) is another credit that people often forget about when filing. This tax credit is designed to help cover 20 percent of your first $10,000 in education expenses. That means the credit can be worth up to $2,000.

What’s special about the Lifetime Learning Credit is that it’s not restricted to undergraduates and there’s no age limit. If you’re an adult learner taking a class at a qualified institution, then you can still qualify for this credit. This makes the LLC a valuable resource when filing taxes.

Still, there are some important things to remember with the Lifetime Learning Credit. When it comes to credits like the LLC or the AOTC, you can only choose one or the other. However, if you have multiple dependents in college you can use one credit for one student and one for the other.

3. Tuition and Fees Deduction

couple working on budget togetherHere’s another helpful education tax benefit that can help you save big on college. The Tuition and Fees deduction lets you deduct $4,000 in eligible education expenses from your income as long as your modified adjusted gross income (MAGI) is less than $65,000 as a single filer (or $130,000 if you’re married and filing jointly). Sadly, married couples filing separately aren’t eligible.

The tuition and fees deduction only applies to expenses you personally paid. That means you can’t deduct expenses you paid for using savings from a 529 plan or covered using scholarships or grants. That said, you can use this education tax benefit for what’s leftover.

Let’s say your tuition and fees were $20,000. If you paid for $16,000 of it using 529 savings and scholarships, that’d still leave $4,000 for you to cover. The Tuition and Fees deduction can be used in that scenario.

And it gets even better! The Tuition and Fees deduction is what’s called an “above-the-line” deduction. This means the amount is taken off the top to lower your overall taxable income. If you made $60,000 last year and took the Tuition and Fees deduction, then your taxable income would be only $56,000. The result is you pay less taxes overall!

On top of that, because it’s above-the-line, you don’t have to itemize your taxes to claim it. You can take the Tuition and Fees deduction and still claim the standard deduction.

Even so, it’s important to remember that you cannot take the tuition and fees deduction if you have already used another tax credit like the American Opportunity Tax Credit or the Lifetime Learning Tax Credit. Carefully review your options and make sure you’re taking the education tax benefit that helps you the most. Be sure to talk with a tax advisor for more information.

4. Student Loan Interest Deduction

There are many parents out there still making payments on their student loans. Depending on your situation and your income, you may qualify for the student loan interest deduction.

If you have a student currently in college who is already making payments on their student loans, then that’s terrific! If their student loans have already begun accruing interest, then any payments made on that interest can be deducted. You can deduct up to $2500 from your taxable income. Be sure to check this one out if you (the parent) are also making student loan payments –you might be eligible as well!

Like the Tuition and Fees deduction, the Student Loan Interest Deduction is an above-the-line deduction. It comes right off the top to reduce your taxable income and you don’t even have to itemize!

5. Educator Expense Deduction

This one is really for the teachers, but it’s still a valuable education tax benefit. Most of us know how often hard-working teachers spend their own money on supplies for the classroom. Maybe you’re one of these teachers. This tax deduction is designed to help lighten the load.

You can deduct up to $250 in school supplies and expenses from your taxes. If you and your partner are both teachers and you file taxes together, that amount goes up to $500. Don’t forget to keep all your receipts if you want to deduct them from your taxes!

The Educator Expense Reduction is available to teachers, counselors, principals, and instructors who worked at least 900 hours in a K-12 classroom during the school year. The deduction doesn’t apply to homeschooling, pre-schools, or college-level teaching expenses.

6. 529 Plans and Qualified College Savings Plans

Another way to find tax benefits for college is through a college savings plan. While you can’t directly deduct your contributions from your taxes, there are NC 529 tax benefits that can help you pay for college in the long run.

When you invest in an NC 529 Plan, your savings will grow tax-free. Then, when you decide to withdraw those earnings down the road, there are no penalties or taxes as long as the funds are used for qualified education expenses. There are many education expenses that NC529 money can be used for, so be sure to check it out.

Make the Most of Tax Advantages and Start Saving Today!

Don’t wait to start saving money when it comes to college. Make sure you’re taking advantage of these terrific tax credits. While you’re at it, make sure you open an NC 529 Account and start growing your savings, tax-free, today!

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