Are Education Expenses Tax Deductible? 3 Education Benefits to Know
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. Whether you’re a college student, a parent of a student, or both, here are three deductions and credits you may not know about that can help you save big. For more information, reach out to your tax advisor for assistance.
1. American Opportunity Tax Credit (AOTC)
The AOTC applies only to the first four years of post-secondary education, such as college and career or technical school. This generally would apply only to undergraduate students; unless the student was able to complete their undergraduate degree in less than four years. Then, they could potentially claim some or all of graduate school.
You can receive up to $2,500 per student, per year, with the AOTC. It’s calculated as 100% of the first $2,000 of eligible education expenses, plus an additional 25% of the next $2,000 in expenses. So, to receive the full $2,500 tax credit, you will need to claim $4,000 in eligible education expenses. These include tuition payments, required school fees, books, and other qualified expenses. Students must be enrolled in school at least half-time to claim the credit.
Taxpayers can qualify for the AOTC if their adjusted gross income is less than $90,000 for single parents, or $180,000 if married filing jointly.
2. Lifetime Learning Credit (LLC)
The LLC offers education tax benefits for many who don’t qualify for the AOTC. For instance, it’s an excellent source of graduate student tax credit. Students pursuing undergraduate, graduate, professional, and continuing degree courses may be eligible for the LLC. That means you, your spouse, and your child could take advantage of the LLC when you’re enrolled in college.
You can receive up to $2,000 per student, per year. The credit is calculated as 20% of the first $10,000 of higher education expenses you paid out of pocket, which totals $2,000. Qualified education expenses for the LLC include tuition, fees, books, and required course supplies. Best of all, there’s no limit to how many years you can claim the LLC on your taxes.
The LLC income requirements are the same as for the AOTC. You can still qualify for the LLC if you make under $90,000 as a single filer ($180,000 if married filing jointly), but the amount of your credit is reduced if you make between $80,000 and $90,0000 (or $160,000 to $180,000 if filing jointly).
3. 529 Plans and Qualified College Savings Plans
Another way to find education tax benefits is through a college savings plan. While you can’t directly deduct your contributions from your taxes, there are numerous tax benefits that can help you pay for college in the long run.
When you invest in an NC 529 Account, your savings can grow tax-free. Then, when you decide to withdraw those earnings down the road, you’ll have tax-free distributions as long as the funds are used for qualified education expenses, including tuition, books, living expenses, student loan payments, and more.
You can’t double-dip and claim an education tax credit and use a tax-free withdrawal from an NC 529 Account to cover the same education expense. (This is also the case for tax-free grants and scholarships when claiming the AOTC or LLC.)
However, remember that some education expenses, such as room and board, don’t qualify for the AOTC or the LLC, but they are considered eligible expenses for the NC 529 Plan. Aside from tuition, room and board can be a huge expense for students living away from home during college. So, use your tax credits as a tuition and fees deduction as much as possible. (That’s $4,000 if you’re claiming the AOTC or $10,000 for the LLC.) Then, you can use a tax-free NC 529 withdrawal to pay for any remaining tuition costs, living expenses, and other eligible education expenses not covered by the federal tax credit.
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 education tax benefits. If you haven’t already done so, open an NC 529 Account and start growing your savings, tax-free, today!