Tax Breaks

Get a Bigger Tax Break for College Expenses

The new American Opportunity credit will reduce your tax bill dollar for dollar.

Has the tuition-and-fees federal tax deduction been renewed? If not, what would be the best strategy for me? I usually get a small refund thanks to that deduction.

The tax deduction covering up to $4,000 in tuition and fees still exists, but the American Opportunity Credit, which was introduced as part of the stimulus package, is a better option. It is a turbocharged version of the Hope credit, which the government offered previously, with higher income limits and bigger tax breaks. And it now covers four years of college rather than just the first two. It’s available for 2009 and 2010.

A tax credit, which reduces your tax bill dollar for dollar, is more valuable than a tax deduction, which merely reduces the amount of your income that is taxed. You may qualify for an American Opportunity Credit of up to $2,500 as long as you spend at least $4,000 in tuition and qualified expenses (including fees, books and related course materials). And if your credit exceeds your tax liability, you may receive a refund check (up to $1,000 more than your tax bill). In the past, you could qualify for the Hope credit only if your income was less than $58,000 for single taxpayers or $116,000 for married taxpayers filing jointly. But the American Opportunity Credit bumps up those limits to $90,000 for singles and $180,000 for joint filers.

By contrast, the maximum $4,000 tuition deduction would lower your tax bill by just $1,000 if you were in the 25% federal tax bracket. The tuition-and-fees deduction has lower income limits than the American Opportunity Credit, but it is available for graduate-level expenses not covered by the credit. Individuals with incomes up to $65,000 ($130,000 for married couples) qualify for the full $4,000 deduction. Individuals with incomes between $65,000 and $80,000 (between $130,000 and $160,000 for married couples) are eligible for a $2,000 deduction.

Got a Question? E-mail Kim at askkim@kiplinger.com.

Most Popular

When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit
Tax Breaks

The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit

If you didn't get a stimulus check, or you didn't get the full amount, you may be able to claim the recovery rebate credit on your 2020 tax return.
January 18, 2021

Recommended

President Biden Extends Student Loan Relief
Coronavirus and Your Money

President Biden Extends Student Loan Relief

One his first day as president, Joe Biden continued the suspension of student loan payments until October.
January 21, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under President Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 20, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket
Coronavirus and Your Money

12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket

President Biden's "American Rescue Plan" includes several proposals to assist people financially harmed by the pandemic.
January 20, 2021