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.

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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.

For 2019, you can claim the American Opportunity Tax Credit of 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 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.
  • $2,500 x 3 = $7,500

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 even if your federal income tax bill has been reduced to zero.

The Lifetime Learning credit

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.

  • You can only claim one Lifetime Learning credit per year, no matter how many students you have in your household.
  • For 2019, the income limit is $116,000 if you are married filing a joint return.
  • For 2019, the income limit is $58,000 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.

Dependency rules

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 claiming them as a dependent.
  • Let the student claim the credit on his or her own tax return.

The student does not get to claim themselves on their tax return, but the value of the education credit may make it preferable for the parent to forfeit their claim of the child as a dependent.

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Tuition and Fees Deduction

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 2019 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 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 2019, this tax break begins to phase out at $121,600 of modified adjusted gross income (MAGI) for married joint filers ($81,100 for single taxpayers).
  • 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.