Key Takeaways
- The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLTC) can be generous tax breaks for college costs.
- The AOTC can provide a credit of up to $2,500 per student for the first four years of college if income levels are below $160,000 (married, filing jointly) or $80,000 (single). The credit phases out above these income levels, and up to 40% can be refundable.
- The LLTC can provide a credit of up to $2,000 per tax return for an unlimited number of years for any qualifying degree or non-degree course. Only one LLTC can be claimed per year, and income limits determine eligibility. The LLTC cannot be claimed for the same student and year as the AOTC.
- If income levels are too high for the AOTC or LLTC, parents can elect to forgo claiming their student as a dependent, potentially allowing the student to claim the credit on their own tax return. The Tuition and Fees Deduction is another option for qualified expenses.
Tax breaks for college
The most generous tax breaks for college costs are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLTC), which offset your tax bill dollar-for-dollar compared to a tax deduction that merely reduces the amount of income subject to tax.
The American Opportunity Tax Credit
The American Opportunity Tax Credit is based on 100% of the first $2,000 of qualifying college expenses and 25% of the next $2,000, for a maximum possible credit of $2,500 per student.
You can claim the AOTC for a credit up to $2,500 if:
- Your student is in their first four years of college.
- Your income doesn't exceed $160,000 if you are married filing a joint return.
- Your income doesn't exceed $80,000 as a single taxpayer.
- Above these income levels, the credit is phased out.
The AOTC can be claimed for as many eligible students as you have in your family. For example,
- If you have three kids who are all in their first four years of college, you can potentially qualify for up to $7,500 of American Opportunity Tax Credits.
- $2,500 x 3 = $7,500
Up to 40% of the AOTC amount is refundable. That means you can collect at least some of any credit amount that is left over even if your federal income tax bill has been reduced to zero.
The Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit—which can be as much as $2,000 per tax return, based on 20% of up to $10,000 of qualifying higher-education expenses—is available for an unlimited number of years for just about any degree or non-degree course.
- You can only claim one LLTC per year, no matter how many students you have in your household.
- For 2024, the income limits are:
- $180,000 if you are married filing a joint return
- $90,000 for single taxpayers
- Above these income levels, the credit is phased out.
You cannot claim both the American Opportunity Tax Credit and the Lifetime Learning Tax Credit for the same student in the same year.
TurboTax Tip:
Tax-free distributions can be taken from 529 College Savings Plans or Coverdell Education Savings Accounts, and certain U.S. Savings Bond interest can be tax free when used for qualified education expenses but cannot be used for the same expenses as those claimed for the AOTC or LLTC.
Dependency rules
If your income is too high to claim the AOTC or LLTC and your student has enough taxable income of their own such that they would owe federal income tax, you can elect to:
- forego claiming them as a dependent
- fet the student claim the credit on their own tax return
In this case, the parent does not get to claim the student as a dependent and therefore will miss out on any child or dependent credit. However, the value of the education credit may make it preferable for the parent to forfeit their claim of the child.
If the student can be claimed as a dependent on someone else's tax return (such as the parent's tax return) then the student is not eligible to claim the refundable portion of the AOTC on their own tax return.
Tuition and Fees Deduction (for tax years before 2021)
Another option is to claim a deduction of up to $2,000 or up to $4,000 of qualified tuition and mandatory enrollment fees, depending on your income.
- You do not have to itemize your deductions to claim the tuition and fees deduction.
- You cannot claim the deduction in the same year that you claim the American Opportunity or Lifetime Learning credit for the same student’s expenses.
- The Tuition and Fees Deduction has been extended through the 2020 tax year.
The above-the-line tuition deduction allows:
- Married couples with incomes of $130,000 or less ($65,000 for single taxpayers) to deduct up to $4,000 in qualifying expenses, and
- Married couples earning $130,000 to $160,000 ($65,000 to $80,000 for single taxpayers) to deduct up to $2,000.
Tapping tax-free college savings
You can take tax-free distributions for qualified education expenses from your child's 529 College Savings Plan or Coverdell Education Savings Account.
- You can use tax-free withdrawals from Coverdell ESAs and 529 College Savings Plans to pay qualified education expenses in the same year as the American Opportunity or Lifetime Learning credits, as long as you don't use them for the same expenses.
Tax-free U.S. Savings Bond interest
Interest earned on Series EE or Series I U.S. Savings Bonds issued after 1989 can be tax-free if the bond is redeemed and used to pay for qualified college tuition and fees.
- For 2024, this tax break phases out between $145,200 and $175,200 of modified adjusted gross income (MAGI) for those filing Married Filing Jointly and between $96,800 and $111,800 for those filing as Single.
- The tax-free Savings Bond provision cannot be used for the same expenses that are used to claim other educational tax breaks such as the American Opportunity or Lifetime Learning credits.
TurboTax can help you take advantage of a wide variety of tax breaks on college costs.
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