Going to college is a significant step, not only for the student involved but also for their parents or guardians. As college tuition continues to increase, both parents and students alike are in the process of exploring any and all financial opportunities that will help offset the cost of enrollment. Fortunately, the Internal Revenue Service provides tax deduction opportunities for students, their parents or their spouse. Depending on who specifically is paying the college tuition, education tax credits are available through the federal government that can be applied to your next tax return.
The IRS allows for certain qualified education expenses to be deducted. It also provides important credits that help offset the cost of a higher education.
Understanding Your Deduction Opportunities
According to the IRS, the individual paying college tuition, either for themselves or their dependent, has the ability to claim up to a $2,500 American Opportunity Tax Credit on their taxable income. A Lifelong Learning Credit is also available to qualified students, with a value of up to $2,000 on each annual tax return as a tax credit. It is important to note that this particular college tax credit is distinctly unique from a deduction. Unlike a deduction, which reduces the amount of income an individual must pay taxes on, a tax credit reduces the sum total of tax by the designated amount.
In terms of deduction opportunities, a Tuition and Fees Deduction is available to those paying college tuition and is capable of reducing your taxable income by up to $4,000. If a student has borrowed money to pay for their college, they also have the opportunity to deduct any interest they have paid on their student loans up to $2,500. These education tax deductions can prove to be very effective in reducing the annual tax debt of students or the individuals financing their education.
Rules and Regulations
Although numerous deductible college expenses can be identified, it is very important for those paying tuition to review all of the eligibility requirements for the credits and deductions available. For example, if a parent is seeking to claim tax credits or deductions, they must first ensure that the son or daughter attending college is listed as a dependent on their tax return. If they are not listed, these credits and deductions will not be available to them.
Qualifying individuals are only capable of claiming one of the two credits offered by the federal government. Anyone claiming a tax credit or deduction must have a valid Social Security number of taxpayer ID number. If you are planning on deducting your college loan interest, the loans must have been used to pay for qualifying expenses, including tuition, room and board, school supplies or a variety of other logistical expenses, such as public transportation
Claiming Your Deductions and Credits
The IRS Form 8863 is used to claim either the American Opportunity Tax Credit or the Lifelong Learning Credit. For any deductions related to loan interest, a qualifying individual can use IRS Form 1040. These deductions have been available for the past several years, which means that tax filers will likely be able to anticipate similar education tax deductions, college tax credits and eligibility requirements for several years forthcoming.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.