The Lowdown on Education Tax Breaks

Eric Bronnenkant, head of tax at Betterment, told CNET that the child tax credit is one of the most valuable for taxpayers. They have a combined $8,000 ($4,000 each) in qualified education expenses and $6,000 in nonqualified education expenses. The wife received $3,500 and the husband received $2,500 in qualified scholarships and grants. The scholarships and grants by their terms can be used for nonqualified expenses.

  • The tax credit is not refundable if the taxpayer can be claimed it as an exemption on someone else’s income tax return.
  • Planning and saving for your child’s college is something that many parents start thinking about even before their children are born.
  • Here’s a brief look at how they work and an overview of the most common ones you may qualify for.
  • Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.

A Coverdell Education Savings Account (ESA) used to be the college savings account of choice for most people before 529 Plans were invented. The first year of college, I went to an extremely expensive school with $40K/year tuition. That $40K school is now up to $55K/year and that’s just for tuition. It is important to keep copies of documentation relating to the AOTC.

Bigger, Better College Tax Credit

The taxpayer and the student must each have a Social Security Number or Individual Taxpayer Identification Number (ITIN) by the due date of the income tax return to claim the tax credit. Even if the taxpayer and student later get a Social Security Number or ITIN, they cannot retroactively claim the American Opportunity Tax Credit for tax years when either did not have a Social Security Number or ITIN. The American Opportunity Tax Credit provides a greater financial benefit per dollar of eligible expenses than any other education tax benefit. Most taxpayers who are eligible for the American Opportunity Tax Credit will be in the 25% tax bracket or lower.

  • Under the American Opportunity Credit, they qualify for a credit of $2,500, $1,000 of which is refundable.
  • What’s more, student loan borrowers pay an average of $1,898 in interest each year.
  • SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S.
  • While 529 college savings plans provide a tax incentive to save, and the student loan interest deduction may help after graduation, other write-offs may be limited.
  • No two situations are exactly alike so if you need help navigating the nuances of tax deductions or credits related to your 529 plan, it’s best to speak with a licensed tax professional.

To maximize their credit, the couple can use their combined $6,000 of scholarships and grants to pay for $6,000 in nonqualified education expenses and report the $6,000 as taxable income. The couple’s qualified education expense would no longer be reduced by the qualified scholarships and grants. Thus, they could each claim $4,000 in qualified education expenses when calculating the education expenses (see the results in the “AOTC” column in the table “Family With Both Spouses Attending College”). Notice this strategy would have a negative effect if used to claim the lifetime learning credit (see the “LLC” column in the same table). On top of tuition and fees, books and supplies (including a computer) count as eligible school expenses. However, the same tuition expenses may not be used to claim any of the other education tax credits, deductions or exclusions.

Education Savings Bond Program

Originally scheduled to be discontinued after 2017, the tuition and fees deduction was extended through the 2020 tax year as part of the Further Consolidated Appropriations Act. Private loans from family, friends, or employer plans do not count toward this deduction. Unlike the AOTC, however, there’s no limit on the number of years you can claim the credit. In addition, you don’t have to be pursuing a degree or be enrolled at least half time.

To learn more about the tax benefits of the NC 529 Plan, or to open an account, visit our website. You cannot claim the AOTC and the LLC for the same student in the same year. If you qualify for both tax credits, financial experts recommend you take the AOTC because you get a larger tax refund. You may want to discuss your options with a financial advisor to determine which tax credit is right for your family. A 529 plan is one of the most popular ways parents can grow their child’s college savings. Additionally, a 529 savings plan offers tax incentives to be aware of come tax season.

More credit for lower- and higher-income taxpayers

If the student claims the American opportunity tax credit, he should not apply the full $8,000 in scholarships and grants to nonqualified expenses. It is better to allocate $3,000 toward qualified education expenses and the remaining $5,000 to nonqualified expenses. This allows the student to retain $4,000 ($7,000 — $3,000) in qualified education expenses, the maximum amount allowable in calculating the American opportunity tax credit. This allocation creates a $1,900 tax benefit when compared with the original return (see the table “Student in Undergraduate and Graduate School in the Same Year”). What’s more, the new tax credit is available to more taxpayers than the Hope Credit.

Bigger, Better College Tax Credit

The American Opportunity tax credit, which replaced the Hope Scholarship credit in 2009, covers more years of college and offers bigger, better benefits to more taxpaying students or their families. Here’s how the American Opportunity tax credit and Lifetime Learning credit, another helpful education tax credit, can help offset the rising cost of attending college. The Lifetime Learning credit is worth up to $2,000 for qualified tuition and fees for courses taken throughout one’s lifetime to acquire or improve job skills. It’s broader than the American Opportunity credit — students enrolled less than half-time as well as graduate students are eligible.

This generally would apply only to undergraduate students, unless the student was able to complete their undergraduate degree in less than four years. You also must have a modified adjusted gross income (MAGI) of $80,000 or less ($160,000 if you’re married and filing jointly). The amount of the credit is gradually phased out for MAGIs between $80,000 and $90,000 (or $160,000 and $180,000 for married filing jointly). While federal student loan payments are set to resume in October, some graduates might have student loans forgiven through other programs.

Does TurboTax Deluxe include stocks?

While TurboTax Deluxe 2022 Federal Only Digital Download does include the forms for capital gains on stock, we do suggest TurboTax Premier 2022 to get the guided interview questions to ensure information is being accurately entered.

Our partners cannot pay us to guarantee favorable reviews of their products or services. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. You cannot deduct the dollar value of vacation time or annual leave taken to attend classes. To make things extra complicated, the two home improvement credits have new names and rules due to the Inflation Reduction Act, but we’ll break them down for you.