TurboTax can help you take advantage of tax breaks to ease the financial burden of sending kids to college, including tax credits, tuition deductions, tax-free savings and more.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
American Opportunity Tax Credit and Lifetime Learning Credit
The most generous tax breaks for college costs are the American Opportunity Tax Credit and Lifetime Learning Credit, which offset your tax bill dollar-for-dollar compared to a tax deduction that merely reduces the amount of income subject to tax.
- You can't claim both credits for the same student in the same year, and income limits restrict who can claim them.
- For 2017, you can claim the American Opportunity Tax Credit of up to $2,500 if your student is in his or her first four years of college and your income doesn't exceed $160,000 if you are married filing a joint return ($80,000 for single taxpayers).
Above these income levels, the credit is phased out. The 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.
The American Opportunity Tax Credit 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.
Up to 40% of the American Opportunity Tax Credit amount is refundable. That means you can collect at least some of any credit amount that is left over after your federal income tax bill has been reduced to zero.
The Lifetime Learning credit—which can be as much as $2,000, 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.
- But you can only claim one Lifetime Learning credit per year, no matter how many students you have in your household.
- For 2017, the income limit for the Lifetime Learning credit is $112,000 if you are married filing a joint return ($56,000 for single taxpayers).
- Above these income levels, the credit is phased out.
You cannot claim both the American Opportunity credit and the Lifetime Learning credit for the same student in the same year.
If your income is too high to claim the American Opportunity or Lifetime Learning credit and your student has taxable income of his or her own, you can elect to forego the dependency exemption ($4,050 for 2017), and let the student claim the credit on his or her own tax return.
The student does not get to claim the dependency exemption, but the value of the education credit may make it preferable for the parent to forfeit the exemption.
For tax years prior to 2018, another option is a tax deduction of up to $2,000 or up to $4,000 of qualified tuition and mandatory enrollment fees, depending on your income. The above-the-line tuition deduction allows married couples with incomes of $130,000 or less ($65,000 for individuals) to deduct up to $4,000 in qualifying expenses, and those couples earning $130,000 to $160,000 ($65,000 to $80,000 for single taxpayers) to deduct up to $2,000.
You do not have to itemize your deductions to claim the tuition and fees deduction, but 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 ended with the 2017 tax year unless it is renewed by Congress.
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 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 Savings Bond interest
Interest earned on Series EE or Series I 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 2017, this tax break begins to phase out at $117,250 of modified adjusted gross income (MAGI) for married joint filers ($78,150 for single taxpayers). The tax-free Savings Bond provision cannot be used for 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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