The cost of a higher education can make it difficult for students and families to pay for college without help in the form of financial aid, scholarships and tax breaks. According to the Department of Education, the average cost of annual tuition, room and board for a full-time undergraduate was $15,014 at four-year public institutions and $32,790 at four-year private institutions in the 2009-2010 academic year. The Internal Revenue Service offers three tax deductions for higher education expenses that can significantly reduce the cost of paying for college.
Tuition and Fees
The IRS offers a tax deduction on college tuition and fees for middle-income and low-income individuals. If you have a modified adjusted gross income of $80,000 or less as a single filer or $160,000 as a joint filer, you can deduct the cost of tuition and required fees you paid during the year for yourself, your spouse or your dependent. The deduction for tuition and fees is limited to a maximum of $4,000 a year. You can't claim the deduction if your tax filing status is married filing separately or if you can be claimed as a dependent on someone else's tax return.
Student Loan Interest
If you take on debt to pay for college, a portion of the student loan interest you pay may qualify for a tax deduction. According to the IRS, if your modified adjusted gross income is less than $75,000 as a single filer or $150,000 as a joint filer, you can deduct student loan interest paid on a loan taken out to fund your own education or the education of a spouse or dependent. The deduction can reduce your income tax by a maximum of $2,500 and includes loans taken out for tuition, fees, books, supplies, room, board and other necessary higher education costs like transportation expenses.
Employers sometimes require or encourage workers to take college courses to keep jobs or improve skills needed at work. If you pay for work-related education and your employer doesn't reimburse you for the cost, you can take an itemized deduction for expenses that exceed 2 percent of your adjusted gross income. You can’t deduct education that is needed to meet the minimum educational requirements for your job or that qualifies you for a new trade or business.
When you file your income tax return, you have to option of taking a standard deduction granted by the IRS or the sum of your "itemized deductions." Itemized deductions include a wide variety of common expenses like real estate taxes, mortgage interest and charitable donations. You can take the deduction for tuition and fees and the student loan interest deduction regardless of whether you choose to use your itemized deductions or the standard deduction. You must itemize your deductions to take the deduction for work-related education.
The government offers two tax credits for education expenses that can be taken instead of the deduction for tuition and fees: the American opportunity tax credit and the lifetime learning credit. The American opportunity tax credit provides a maximum credit of $2,500 and lasts through the end of 2012. The credit applies to single individuals with modified adjusted gross income of $80,000 or less and joint filers who make $160,000 or less. The lifetime learning credit provides a maximum credit of $2,000 and can be taken by single filers with modified adjusted gross income of no more than $61,000, or $122,000 if married filling jointly. The American opportunity credit can only be claimed for four years of higher education, while there is no limit on the number of times you can claim the lifetime learning credit. You can't claim both the American opportunity and the lifetime learning credit in the same year.
- Internal Revenue Service: Tax Benefits for Education: Information Center
- Internal Revenue Service: Topic 457 - Tuition And Fees Deduction
- Internal Revenue Service: Topic 456 - Student Loan Interest Deduction
- U.S. Department of Education, National Center for Education Statistics: Tuition Costs of Colleges and Universities
- Internal Revenue Service: American Opportunity Tax Credit
- Internal Revenue Service: American Opportunity Tax Credit: Questions and Answers
- IRS: Lifetime Learning Credit
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.