You May Be Eligible for Higher Education Tax Benefits
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 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 benefits that are available include:
- The American Opportunity Tax Credit: This is a credit, which 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.
- 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 and should only be used once you have exhausted other tax credit options. 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.
- Tuition and Fees Tax Deduction: Depending on your Modified Adjusted Gross Income, this deduction can reduce taxable income by as much as $4,000 and may be of benefit if you are not eligible for the tax credits. You can claim this deduction even if you do not itemize deductions.
- 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.
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.
If you make less than $54,000 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 $66,000 or less.