5 Great Tax Breaks for College Students and Parents

Sure, college is expensive, but qualifying for one of these five tax breaks may make higher education a bit more affordable.

Deductions reduce the amount of your income that could be subject to tax. But even better, a tax credit lowers your bottom-line tax bill dollar for dollar. Be aware, you can't double dip — meaning the same expenses can't be used to claim more than one credit or deduction.

  1. American Opportunity Credit. This tax break applies to expenses, such as tuition and required course materials, paid during a student's first four years of college. The maximum credit — $2,500 a year — is available to single filers with a modified adjusted gross income (MAGI) of up to $80,000 and to married joint filers with a MAGI of up to $160,000. The credit phases out completely once income reaches $90,000 for singles and $180,000 for joint filers.
    The American Opportunity Credit is partially refundable. So, even if you don't owe any taxes, you can claim up to 40% of the credit (or $1,000) as a refund.
  2. Lifetime Learning Credit. A student doesn't have to be an undergrad to qualify for this credit worth up to $2,000. For example, you can claim it if you return to the classroom to improve your job skills. The credit is worth 20% of the first $10,000 spent each year on education expenses, or a maximum of $2,000 annually. A full or partial credit is available to joint filers with a MAGI under $138,000 and to singles with income less than $69,000.
  3. Tuition and fees deduction. You don't have to file an itemized return to get this deduction — worth up to $4,000 — for tuition, fees, and required course materials that you've paid. You can qualify for a full or partial deduction if your MAGI is not more than $80,000 on a single return or $160,000 on a joint return.
  4. Student loan interest deduction. You can deduct up to $2,500 in interest you pay each year on student loans without filing an itemized return, as long as you're not claimed as a dependent on another person's tax return. This deduction disappears once MAGI reaches $85,000 for singles and $170,000 for married joint filers.
  5. 529 college savings plans. Money invested in a state-sponsored 529 plan grows tax-sheltered and can be withdrawn tax free to pay for eligible education expenses. The list of eligible expenses has recently expanded: You can now use 529 money to cover the cost of certain apprenticeship programs; and withdraw up to $10,000 from the account (in total, not annually) to repay student loans.
    States also have generous contribution limits — in some cases totaling $500,000 or higher — and more than 30 of them give an income-tax break to residents contributing to the home-state 529 plan. Visit collegesavings.org for links to state plans.

Get more information on credits and deductions for college at the IRS Tax Benefits for Education Information Center.

Please note: The contents of this publication provided by ICMA-RC is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment adviser to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document contains information obtained from outside sources and it references external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.

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