Asian Fortune Your source for all things Asian American
By Chris Peden
One constant in life (besides death and taxes) seems to be cost of college rises quickly every year. According to The College Board, tuition and fees for college have increased 5.4 percent annually above inflation in the decade following the 2001-2002 school year. As a parent, I will lie awake at night wondering how we are going to pay for my son’s college education. Like most parents, we have been putting money aside for his entire life, but still wonder whether or not this will be enough. However, there are a few deductions and credits you can take on your tax return that can take the bite out of paying for college.
Let’s say you decide to take out a loan to pay for college expenses. You can deduct the interest on that loan on your tax return. This deduction would reduce the amount of income on which you would be taxed. However, there are certain restrictions. For instance, the loan must be:
i) For you, your spouse, or a person who was your dependent when you took out the loan.
ii) Used to pay for college expenses that were paid or incurred within a reasonable period of time before or after the loan was taken out.
iii) For an eligible student’s education provided during an academic period.
Additionally, the loan cannot be from someone who is related to you or the student, or from an employer’s retirement plan. The expenses that the loan can pay for include tuition and fees, room and board, books, supplies and equipment, as well as other necessary expenses, like transportation.
Another deduction you can take is a deduction for tuition and fees. This will reduce the amount of income that would be subject to taxation by up to $4,000. Like the deduction for student loan interest, you do not need to itemize your deductions to take this deduction. You can take this deduction if you paid qualified higher education expenses for an eligible student, and that student is you, your spouse, or a dependent you can claim on your tax return. Unfortunately, you could not take this deduction if you file as married filing separately, or someone claims you as a dependent on their return.
There are a couple of education credits you can take to reduce your tax bite. The first one is the American Opportunity Tax Credit. This can be claimed for tuition and required fees incurred during the first four years of a student’s post-secondary education. You would include expenses that may or may not be paid directly to the college for course-related books, supplies and equipment. The tax credit is for up to $2,500, but you can only get $1,000 as a refund if the credit reduces the taxes you below zero to give you a refund.
Additionally, you may be able to claim the Lifetime Learning Credit. You can deduct up to $2,000 you paid for qualified educational expenses for an eligible student. Unlike the American Opportunity Tax Credit, there is no limit to the number of years a student can claim this credit. This means that you can claim this credit for expenses to obtain a Master’s degree.
A few things to keep in mind with the credits. You cannot take both the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student in the same year. However, if you have more than one student for whom you pay educational expenses, you can take credits either the same or different students on a year to year basis. If you have two students for whom you paid college expenses, you can take the American Opportunity Credit for one and the Lifetime Learning Credit for the other.