Going to college seems to get more expensive every year. Tuition, fees, room and board for an out-of-state student attending a four-year public institution cost $28,240 for the 2022-2023 school year (on average). About a decade ago, an in-state student would’ve paid an average of $15,180 (in 2016 dollars) for the same expenses. There’s not much you can do about rising college costs, but there are a few tax breaks you can use to help offset the cost of college. A financial advisor can help you optimize a tax strategy for your education needs and goals.
Tax Credits for College Students
There are two additional tax breaks that students in college (or their parents and guardians) might benefit from: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC allows parents (and students who aren’t considered dependents) to reduce their tax bill by up to $2,500 for up to four years. Since it’s a refundable tax credit, it can increase the size of your tax refund even if it reduces your tax liability to a negative number.
Independent students and parents can qualify for the AOTC if they paid for qualified education expenses used for undergraduate courses. But the amount you’re allowed to claim depends on your modified adjusted gross income (MAGI). In order to get the full $2,500 credit, your MAGI cannot be higher than $91,850 (or over $137,800 for joint filers) in 2023.
The LLC, on the other hand, is a nonrefundable tax credit. This means that you can’t get a refund if the credit lowers your tax liability to an amount below zero. So you’re better off claiming the AOTC. But still, the LLC is helpful because parents and students can claim the credit if they’re paying for an undergraduate education, graduate school or technical school. Plus, there’s no rule saying that it can only be claimed for a certain number of years.
To get the full $2,000 LLC in 2023, your MAGI can’t be higher than $80,000 if you’re single or $160,000 if you’re filing a joint tax return. You’re ineligible for the tax credit if your filing status is married filing separately, you were a nonresident alien at some point during the year and/or someone else is claiming you (or the student you paid for) as a dependent.
The Student Loan Interest Deduction
One useful tax break for college graduates and their parents is the student loan interest deduction. For your 2023, this deduction is worth the amount you paid in interest for your student loans, up to $2,500, which is the maximum deduction.
In order to qualify for the deduction, you must meet the following criteria:
- You paid interest, in 2023, on a qualified student loan.
- You’re using any filing status except married filing separately.
- Your modified adjusted gross income (MAGI) is less than $90,000 in 2023 if you file single, head of household or as a qualifying widow(er). Your MAGI is less than $185,000 in 2023 if you’re filing a joint return.
- No one else is claiming you (or your spouse if you’re filing a joint return) as a dependent on their tax returns.
For a student loan to qualify for the deduction, you must have used the loan to pay higher education expenses for yourself or for one of your dependents (with only a couple of exceptions).
To calculate your exact deduction, you can use the Student Loan Interest Deduction Worksheet that the IRS provides.
The Tuition and Fees Deduction
The deduction for tuition and fees expired on December 31, 2020. However, taxpayers who paid qualified tuition and fees in 2018, 2019 and 2020 could claim a maximum deduction of $4,000. The loss of this deduction highlights how useful a 529 college savings plan can be for saving money on college expenses.
You could get this tax break if you covered the cost of those qualified education expenses for a college student such as yourself, one of your dependents (as long as no one else claims the dependent on their taxes) or your spouse. Qualified education expenses include tuition and other fees that students are obligated to pay in order to attend a particular institution. But you can’t deduct expenses that you paid for with a scholarship or another tax-free award.
You’re ineligible for the tuition and fees deduction if you and your spouse are filing separate tax returns or you were a nonresident alien for part of the tax year. You can’t claim the tax break if your income is higher than a certain threshold either. If your modified adjusted gross income is above $80,000 (or above $160,000 for joint filers), you can’t qualify for the deduction. Note also that this is an above-the-line deduction. That means you don’t have to itemize deductions in order to take advantage of it.
The deduction for college tuition and fees is no longer available as of December 31, 2020. However, you can still help yourself with college expenses through other deductions, such as the American Opportunity Tax Credit and the Lifetime Learning Credit.
College graduates can also deduct the interest that they pay on student loans. The interest deduction does not require you to itemize your taxes. (The tax filing service H&R Block actually provides the necessary forms for this deduction with their free filing option.) Beyond these credits, it’s very useful to have a 529 college savings plan to help decrease your out-of-pocket costs.
Tax Tips for College Students
- A financial advisor can help you manage the cost of college, set up college savings accounts and determine which deductions and credits you qualify for. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Start gathering financial documents early. Set a deadline for when you’ll have your W-2 forms, 1099 forms, investment income information, last year’s tax refund, student loan interest and the rest of the items listed on the IRS Tax Form checklist. By breaking the intimidating task of filing your taxes into smaller chunks, you have a better chance of avoiding a last-minute marathon session to meet the filing deadline.
- Educate yourself as soon as possible about what you can and can’t deduct from your taxes. It pays to know everything you can about how taxes impact your situation in order to maximize your tax return.
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