If you’re among the 41% of the United States population Fannie Mae’s “How America Pays for College 2016” report revealed relies on family assets to pay for higher education (either for a child or an adult) you may qualify for several tax advantages related to the costs of the degree.
Here are some potential tax advantages to keep in mind before you file your annual Federal and state tax returns, along with how to reclaim education-related tax advantages you may have left on the table in years past.
The American Education Opportunity Tax Credit. Arguably the most valuable education-related tax advantage, this credit allows qualifying taxpayers to claim up to $2,500 per student’s post-secondary education as a tax credit. There are some caveats, including that the student must be enrolled in their academic program at least half-time and be within the first four years of it. The family (or student) is also required to have paid at least $ 4,000 in education-related expenses for qualified tuition, fees and expenses for supplies or textbooks (not room and board) during the specific tax year.
The credit is also contingent on taxpayer income: Tax filers who are married cannot have a modified adjusted gross income of more than $159,999; single tax filers must have a MAGI of less than $80,000 to qualify. However, the credit is calculated in such a way that those who claim it could see a tax refund of up to $1,000, regardless of whether they owe tax.
Think you may have qualified for the AOTC in year’s past but didn’t claim it? You may want to consider filing an amended tax return using Form 1040X and Form 8863, and may be able to do so for the three previous tax filing years. The information on your amended return(s) may also change your state level tax liability for years past.
Lifetime learning credit. If you’ve paid at least $10,000 in qualifying expenses for post-secondary education in a given tax year, you may qualify for this credit of up to $2,000 per year (not for each student who may be in your household). It can be used to offset costs of continuing education for adults as well as college-age students, and doesn’t limit the number of years a person has been enrolled in a program as part of its qualification criterion. Like the AOTC, however, it does limit eligibility to married tax filers who have a MAGI of less than $110,000, or less than $55,000 for single tax filers.
Tuition and fees deduction. If you have a MAGI of less than $160,000 as married filing jointly taxpayers (or less than $80,000 for single filers) you may be eligible to reduce your taxable income by up to $4,000 with this deduction, which applies to tuition expenses related to adult higher education or that of a college-aged child. The deduction was formally extended for the 2015 and 2016 tax years, but isn’t guaranteed to continue in the 2017 tax filing year.
Student loan interest deduction. If you made payment to student loans in this tax year, you may have paid interest on part of the balance. Assuming your (MAGI) is less than $160,000 as a joint married filer, or no more than $80,000 as a single filer, you may be eligible to deduct some or all of the interest you paid on student loans, regardless of whether you itemize. The deduction could reduce your taxable income by up to $2,500.
If you’re eligible for any of these credits, it’s important to note that how you paid for education-related expenses (and will pay for them moving forward). If you withdraw money from a tax-free education plan like a 529 or education IRA to cover college costs, for example, you aren’t eligible to apply the education credit/deductions when you file your tax return for that year. To maximize your potential education-related tax advantages consider paying a portion of education-related expenses from a taxable account (like a mutual fund or savings accounts) up to the required amount so that you’re able to benefit from the tax credit/deduction.
Once you’ve satisfied the requirement, fund remaining education-related expenses for that tax year from any tax-free accounts you may own.