The fees for taking SAT, ACT and other college entrance exams are not tax-deductible, but the federal government does allow a number of educational deductions and tax credits. Find out more about these educational deductions and credits and how they can benefit you.
Unfortunately for mom and dad, the fees for taking SAT, ACT and other college entrance exams are not tax-deductible, but the federal government does allow a number of educational deductions and tax credits. Though they only pertain to the current expenses of students who have already enrolled, you may be able to use those listed deductions and credits to offset your family's other college expenses
Through 2017, you can claim the tuition and fees deduction for college expenses incurred for yourself, your spouse or your children. The deduction is available even if you don't itemize and it covers tuition and mandatory college expenses up to the maximum set by the IRS for the current tax year.
Mandatory expenses include, for example, student activity fees if every student is required to pay them. The IRS halves the deduction for taxpayers above a certain income level, and as income rises further, the deduction is phased out completely.
Beginning in 2018, the tuition and fees deduction is no longer available unless extended by Congress.
Lifetime Learning Credit
The Lifetime Learning Credit allows you to claim up to 20 percent of your out-of-pocket college expenses each year for yourself, your spouse and your children. You can claim a maximum credit of $2,000, if your family's total college expenses add up to $10,000.
You can claim Lifetime Learning for as many years as the student attends college and for both undergraduate and postgraduate studies, even if the student attends only one class a year. The IRS lists other educational tax credits in Publication 970.
The Lifetime Learning Credit has several restrictions. The student must attend what the IRS considers a "qualified college" to claim the credit. A qualified college is one that is eligible to participate in Department of Education student aid programs.
In addition, you can't claim the credit if your annual income exceeds the limit set by the IRS for the current tax year or you are married but you and your spouse file taxes separately. The maximum credit is $2,000 but none of it is refundable.
American Opportunity Credit
The American opportunity credit allows eligible taxpaying students or their parents to offset some of the cost of attending college. The credit typically offers greater tax savings than a tuition deduction since it reduces the tax you owe on a dollar-for-dollar basis rather than just reducing the amount of income subject to tax. However, there are several requirements for eligibility.
An eligible student is a person who has not completed the first four years of post-secondary education, enrolls in at least one academic semester during the applicable tax year and maintains at least half-time status in a program leading to a degree or other credential. If the student has ever been a state or federal criminal because of a drug conviction, then he/she isn’t eligible for the tax credit.
Generally, the American Opportunity Credit is the most generous because up to 40 percent of the credit is refundable meaning that even if you don't owe any tax, you can still get some money back form the IRS.
Claiming education credits
When you file your tax return, you claim your tax credits using IRS Form 8863. You can only claim the credits for out-of-pocket expenses, not costs covered by grants or veterans' benefits. You can only claim one of the credits or deduction for each student on a tax return.
The IRS also cautions that you cannot claim deductions or tax credits for room, board, medical expenses, student health fees, transportation or insurance, even if the fees are mandatory for students.
TurboTax can help you determine which reduction credits you qualify for, and will also recommend the credits that give you the best tax outcome.
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