School Daze: Tailgates, Touchdowns, and Tax Deductions!

As summer comes to an end, students headed back to college campuses and dorm rooms quickly filled up with laptops, books, and backpacks as the new school year gets rapidly underway.   The buzz of an excited freshman class or the sound of a marching
band practicing for the weekend football game breathes renewed life into the academic enterprise as schools across the country proudly display team colors and mascots on game day.  Students, parents, and loyal fans set up for kickoff with tailgating, team spirit, and touchdown victory cheers as starting lines take to the fields.  Defense, defense, get em’ on the offense!

With all of the excitement in the air, another essential defensive play is the bank account.  With great scholastic achievement comes great expectations for parents and students to meet the growing financial demands of a college education.  Excluding scholarship and grant funding, tuition, room, and boarding can seem like a mortgage payment, rather than a potential diploma.   So, where’s the “win-win” on the 0 and 10?

The play-by-play for reducing college expenses may be found in your tax return and associated benefits for higher education.  Tax credits and deductions for education has the potential to reduce the amount of income tax paid, reduce the amount of income subject to tax, and certain educational savings plans may allow accumulated savings amounts to grow tax-free!  With these options in mind, now is a good time to educate families with college students about potential avenues for saving money.

There are two education credits available: the AMERICAN OPPORTUNITY TAX CREDIT and the LIFETIME LEARNING CREDIT.  Eligibility to claim these credits requires meeting all of the following guidelines:

  1. You, your dependent or a third party pays qualified education expenses for higher education.
  2. An eligible student must be enrolled at an eligible educational institution.
  3. The eligible student is yourself, your spouse or a dependent you list on your tax return.

The American Opportunity Credit (AOC) allows for a credit up to $2,500 in qualified education expenses including books, supplies, and equipment for every stu

collegetuitiondent who was enrolled in one of their first four years of a higher education during the tax year. Similar to the AOC, Lifetime Learning Credit (LLC) is for tuition and associated expenses for students enrolled in an eligible institution, but has no set time limit on the number of years to claim the credit.  The LLC is available for undergraduate, graduate, and professional degree courses for as long as the student is enrolled.  

Tuition and Fees Tax Deduction is another option for reducing taxable income and may be a benefit if you are ineligible for either of the tax credits.  This deduction amount can reduce the amount of income subject to tax by up to $4,000 and is categorized as an adjustment to income.  To get the deduction, you must have paid qualified higher education expenses for yourself, your spouse, or a dependent and again includes tuition, books, supplies, enrollment, or equipment.  The deduction is not available for Married Filing Separately or for extracurricular activities and courses not required for a degree.

Different from deductions and credits, educational savings plans are another way for families to prepare for college expenses.  Savings plans are often named 529 college savings plans after the section of the federal tax code that allows for them.  All 50 states now have 529 plans available and although contributions to the plan are not deductible, the contributions and their earnings are eligible for tax-free withdraws when used for qualified education expenses.   Each savings program offers different investment choices and is essentially a 401K dedicated to paying for college expenses.  

A college education ranks among the top three biggest financial commitment a family can make, falling only behind a house or retirement.  When it comes to getting some of the college expenses back in your pockets, saving early and exploring all credit options may be the difference between making and breaking the bank for a higher education.   

For questions and answers about education credits, see here:

For questions and answers about 529 Plan, see here:

By Susan Amsler
September 10, 2016

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