This is a segment of Bautis Financial’s college planning series, which includes webinars, podcast episodes, blog posts and downloadables to aid college-bound students and families in the admissions process. Visit our college planning hub for more valuable resources.
Federal and state income tax filers may be eligible for tax credits, deductions, exclusions and savings plans to help with expenses for higher education. But what’s the difference?
Tax Credit: Reduces the amount of income tax you may have to pay.
Deduction: Reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
Exclusion: A taxpayer won’t have to pay income tax on the benefit they’re receiving, but also won’t be able to use that same tax-free benefit for a deduction credit.
Savings Plan: Certain plans allow the accumulated earnings to grow tax-free until distribution, or allow the distribution to be tax-free, or both.
The Internal Revenue Service (IRS) Publication 970 explains details such as income limits, eligibility requirements, qualified expenditures and how to claim benefits. The IRS also has a Tax Benefits for Education Information Center online that lists the programs, some of which are highlighted below.
- American Opportunity Tax Credit: Allows taxpayers to claim up to $2,500 per student per year for the first four years for qualified tuition and related expenses.
- Lifetime Learning Tax Credit: An individual income tax credit equal to 20% of the first $10,000 of qualified and related expenses paid per year, up to a maximum credit of $2,000.
- Tuition and Fees Deduction: Qualified tuition and related expenses may be deducted up to $4,000. The deduction is only available if the taxpayer’s modified adjusted gross income (MAGI) is $80,000 or less for single filers.
- Student Loan Interest Deduction: Up to $2,500 of the interest you paid on student loans on your federal individual income tax return may be deducted if the taxpayer’s MAGI is $70,000 or less for single filers.
- Qualified Tuition Programs (529 Plans): Withdrawals from Qualified Tuition Programs, used to pay education expenses, are made tax-free.
Even if you normally wouldn’t file a tax return due to your income level, be sure to do so if you’re enrolled in higher education and qualify for one of these benefits.
Consult a Certified Public Accountant for assistance in implementing these benefits. Contact us to provide a CPA recommendation.