The old saying is that March comes in like a lion and goes out like a lamb. Sometimes, this refers to the changes in weather, but it also holds true for the flurry of activity that comes with college financial aid at this time of year. There is usually quite a bit to complete at the beginning of the month, and then it feels like everything comes to a screeching halt once the choice of college is made, and the financial aid award package is accepted.
If you haven’t already completed your federal income taxes, this is another of the tasks you should complete as soon as possible.
Once completed, you can go back to the FAFSA website and use the IRS Data Retrieval Tool to update the application with your current figures.
If you already have a child in college, you may be eligible for some education tax benefits on your federal tax return, which could offset some of the out-of-pocket costs you are incurring. You may be eligible for tax deductions, which reduce the amount that is considered income, or tax credits, which reduce the amount of tax due. Some of the tax benefits that are available for education include:
The American Opportunity Tax Credit
The American Opportunity Tax Credit is a credit that reduces the amount of tax due. You may be eligible to receive a credit of up to $2,500 per student to help offset what you are paying for the first four years of higher education.
The amount varies depending on income, the amount of higher education expenses, and the number of eligible students in a family. Up to 40% of the credit may be refundable, so you may be eligible to receive a refund check, even if you don’t owe any federal income taxes.
Generally, a taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot claim the credit.
The Lifetime Learning Tax Credit
Slightly different from the American Opportunity Tax Credit, this credit is designed to encourage a wider range of education options. It can help pay for undergraduate, graduate, and professional degree courses, which may include courses taken to acquire or improve job skills. This credit provides up to $2,000 per tax return. There is no lifetime limit, but this credit is non-refundable, which means that the maximum amount of credit available is limited to the amount of tax owed.
Student Loan Interest Deduction
Based on income and the amount of interest paid, you may be able to receive a deduction of up to $2,500 for student loan interest paid for yourself, a spouse, or a child. You can also claim this deduction without having to itemize on Schedule A.
Due to the COVID-19 pandemic, the federal government paused payments on federal student loans and reduced interest rates to 0%. This emergency relief has been extended through January 31, 2022.
If you make less than $57,000 per year, you can seek help in preparing your tax returns from The Volunteer Income Tax Assistance (VITA) program. If you do decide to complete your taxes on your own, though, you may be eligible to file your federal income taxes electronically without an out-of-pocket charge if your adjusted gross income is $72,000 or less.
Don’t get blown away by filing your federal income taxes. Check with a tax advisor to make sure you’re taking the proper deductions and credits.