Tax Breaks

Tax Breaks for College Bills

Uncle Sam helps ease the pain of paying for college with a variety tax benefits.

As families prepare to send their students off to college, I tend to get a lot of questions about tax breaks for paying college expenses. Here’s what you need to know.

Can I get a tax break for paying my son’s college tuition?

Maybe. Money paid for tuition, fees, books and other required course materials for the first four years of college may qualify for the American Opportunity Credit, which can shave up to $2,500 from your tax bill. To claim the full credit, you must pay at least $4,000 in qualified expenses -- the credit covers 100% of the first $2,000 of expenses, and 25% of the next $2,000.

To qualify for the tax break, you must claim your son as a dependent on your tax return and your adjusted gross income must be less than $90,000 if you are single or $180,000 if you are married filing jointly (the amount of the credit starts to phase out if you earn more than $80,000 if single or $160,000 if married filing jointly).

For more information, see the IRS’s American Opportunity Credit: Questions and Answers page.

Can I claim the American Opportunity Credit for graduate school?

No, you can claim the credit only for the first four years of college. But grad school expenses may qualify for the lifetime learning credit, which can be worth up to $2,000 per tax return. To qualify for the full credit, you must pay at least $10,000 for tuition and other eligible expenses, and your adjusted gross income must be less than $50,000 if single or $100,000 if married filing jointly. The credit phases out entirely if you earn more than $60,000 if single or $120,000 if married filing jointly.

The lifetime learning credit has much broader eligibility requirements than the American Opportunity Credit: For example, you don’t need to be pursuing a degree to qualify, and you don’t need to be enrolled at least half-time as you do to claim the more generous American Opportunity Credit. To qualify for the Lifetime Learning Credit, you must take classes at an eligible educational institution, which includes any college, university, vocational school or other postsecondary educational institution. (Expenses incurred at many foreign schools that participate in the U.S. Department of Education’s student aid program are eligible, too.) There is no limit to the number of years that you claim a Lifetime Learning Credit; however, you can’t claim it in the same year you claim the American Opportunity Credit for the same student.

Which expenses qualify for tax-free use of 529 funds?

You can use money from a 529 college-savings account tax-free to pay for tuition, fees, books, supplies and required equipment. You can also use the money tax-free for room and board, as long as your child is at least a half-time student. The full cost of room and board counts if the housing is owned or operated by the college. Off-campus housing costs may qualify, too, up to the room and board allowance that the college includes in its cost of attendance for federal financial-aid purposes (your college financial-aid office can give you that figure).

Can I use 529 money to pay college bills and still qualify for the American Opportunity Credit?

You can take advantage of both tax breaks if you carefully plan how to spend the money. For example, if you pay at least $4,000 of tuition and other eligible expenses from funds other than from a 529 account, you may claim the American Opportunity Credit (assuming you meet the income-eligibility requirements). Then you can use 529 money tax-free for remaining expenses, including room and board.

For more information about tax breaks for college expenses, see IRS Publication 970 Tax Benefits for Education and the IRS’s Tax Benefits for Education Information Center.

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