The chart Tax Credits and Deductions summarizes and simplifies the very complex tax credits and deductions available for various college related expenses. The rules are very specific and include many thresholds and exceptions. So, always consult your financial advisor and/or tax preparer before assuming you can claim any credits or deductions mentioned here.
The American Opportunity Tax Credit is the primary credit available the first four years of your student’s post-secondary education. The maximum credit is equal to 100% up to $2,000 of qualifying expenses plus 25% of the next $2,000 of qualifying expenses. Essentially, you receive a credit of $2,500 for $4,000 worth of qualifying expenses you pay towards college. In order to qualify for part of all of this credit, joint tax filers must have income less than $180,000 and single filers must have less than $90,000.
If your student is not enrolled at least half-time working towards a degree, he/she may qualify for the Lifetime Learning Credit or Tuition and Fees Deduction instead. The maximum Lifetime Learning credit is equal to 20% up to $10,000 of qualifying expenses for a credit of $2,000 per return. In order to qualify for part of all of this credit, joint tax filers must have income less than $130,000 and single filers must have income less than $65,000. The Tuition and Fees deduction is available for joint tax filers with income less than $160,000 and single filers with income less than $80,000. The maximum deduction allowed per return is $4,000.
Tax planning is important because no double tax benefit is allowed for all the strategies. This means you cannot withdraw tax-free funds from 529 plan or Coverdell ESA accounts to pay for tuition and simultaneously take a credit or deduction for the same expenses on your tax return. You also cannot claim a credit or tax deduction for college costs reimbursed by your employer or paid with a tax-free scholarship or grant. As a planning note, it is important to remember that qualified tuition programs like 529 plans and Coverdell can be used for room and board, while the tax credits and deductions you claim on your annual tax return do not allow those expenses.