College Tax Credit: A How To Guide

So you and your parents are trying to navigate treacherous waters and figure out how to best pay for college or at least get some college tax credit for your related tuition and expenses.

You’ll be pleased to find out that there are several ways to get college tax credit, but they are complicated, restrictive, and may be overlapping. It may be difficult to understand which tax break to claim or how to combine tax breaks.

College Tax Credit Explained…

The American Opportunity Tax Credit (AOTC) was established in 2009 to allow college tax credit relief to more families then the already existing Hope Credit. It is intended for undergraduate students and allows a maximum tax credit of $2,500 per student per year for four years. Although the AOTC was scheduled to expire, the fiscal cliff tax deal extended it for an additional five years through the year 2017.

The AOTC offers advantages to both those in upper and lower income tax brackets as it allows the highest income of all three credits. For those with a modified adjusted gross income (MAGI) on a joint tax returns the AOTC begins to phase out at an income of $160,000 and is not allowed over $180,000.  For single tax filers and those filing head of household the phase out is between $80,000 and $90,000 of MAGI.

The college tax credit is calculated per student at 100% of the first $2000 in qualified college expenses plus 25% of the next $2000 paid for college fees and expenses. For very low wage earners that don’t owe $2500 in taxes up to an $1000 credit is allowed.

This is by far the most advantageous college tax credit and could save you or your parents an astounding $10,000 per student over a four-year period.

The Hope Tax Credit applied to the tax years of 2008 and earlier. This was considered a non-refundable tax meaning the college tax credit could have reduced your tax to zero but if the credit was more than you owed in taxes then you didn’t get money back. The Hope Credit allowed tax breaks for qualifying college tuition and expenses for eligible students, including yourself, your spouse or a qualifying dependent.

Lifetime Learning Credits are intended for that have exceeded the four-year term allowed for the American Opportunity Tax Credit, for those pursuing post-secondary education, and for eligible students including yourself, your spouse or a qualifying dependent just wanting to take college courses.  There is no limit for the number of years a Lifetime Learning Credit can be used per student. The maximum college tax credit is $2000 per year per student for qualifying expenses. Study the IRS information to education yourself on eligibility requirements and restrictions.

Tuition and Fee Deduction

If you don’t qualify for a college tax credit then you may choose to take a deduction for college tuition and fees. A deduction is not as advantageous as a college tax credit because instead of being a direct write-off it can reduce the amount of your income subject to taxes by up to $4000. This deduction can be claimed even if you do not itemize your taxes.

What Are Qualified College Expenses?

Qualified college expenses include tuition, student activity fees and course related supplies and expenses required as a condition for attendance or enrollment so save your receipts because expenses add up quickly.

Qualified college expenses used in college tax credits don’t include monies taken from tax-free sources including:

  • Tax free 529 college savings or pre-paid plan or a Coverdell Education Savings Account (ESA)
  • Pell Grants
  • Employer provided educational assistance
  • Veteran’s education assistance
  • Any other tax-free funds received for college assistance

 Formulating an College Tax Credit Plan

The trick is that you can’t double or triple dip. You’re not allowed to use the same qualifying college expenses multiple times and get overlapping benefits for the same student using the same expenses. In more specific terms…

  •  If you claim a college tax credit you only get to claim one per student, no all three.
  • If you are paying for college tuition and expenses with a tax-free source of funds as listed above then you are not allowed to use the qualifying expenses paid for from those accounts towards tax credits or as deductions from taxes due.
  • And if you use a college tax credit or a tax-free source of funds you are not allowed to take a tax deduction for those same expenses.

With all of these restrictions you may decide that it’s better to space out your withdrawals from your pre-paid college savings accounts so that you’re still eligible for some tax credits.

As you can see it can be quite complicated when considering multiple college students attending college simultaneously and taking into account income limits while considering use of prepaid college savings plans and undergraduate and graduate studies. You may find it helpful to strategize in advance with a tax planner in order to maximize your tax benefits.

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Heidi Meier

Heidi Meier

Heidi Meier is a junior at the University of California, Davis pursuing degrees in communication and psychology. At school, Heidi can be found participating in psychology experiments or lounging on the quad. Outside of school, she enjoys exploring new cities, adventuring with friends, and playing with her puppy, Pancake.
Heidi Meier

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