Tuition and Fees Deductions: How to Qualify

Change is afoot with college-based tax breaks this year - these deductions and tax breaks lead the list.

Getting a tax break from the Internal Revenue Service on various college costs is a good deal for U.S. students and their families.

After all, tuition, fees and other college costs are rising yet again for the 2020 academic year.

According to data from U.S. News & World Report, average tuition and fee costs stand at:

  • $35,676 for private colleges.
  • $9,716 for state residents who attend public colleges and universities.
  • $21,629 for out-of-state collegians attending state schools.

Is There a Tuition and Fees Deduction?

While there are several tax breaks for students and families who pay college costs, one of the largest ones, the Tuition and Fees Deduction has expired and isn't allowable for the tax year (you can still claim it on your 2017 returns if you're filing them again.)

The deduction allowed taxpayers to deduct the cost of college tuition and any fees associated with attending a college or university from their total taxable income. That covers plenty of costs for U.S. families and the deduction may certainly arise again due to its popularity with voters who have dependents attending college.

If you are taking another crack at your 2017 tax returns, you can claim up to $4,000 for the tuition and fees deduction, dependent on annual income levels, according to the IRS (as follows):

  • $4,000 maximum for income up to $65,000 ($130,000 for joint filers)
  • $2,000 maximum for income over $65,000 and up to $80,000 ($130,000 and up to 160,000 for joint filers)
  • No deduction for income over $80,000 ($160,000 for joint filers)

Education Tax Deductions

Outside of the tuition and fees tax break, there are several solid tax breaks you can take if you're either a college student or the parents of a college student looking for a tax break or two before filing with the IRS.

These college-related tax breaks lead the list:

Private School Tuition Discount

As of 2018, U.S. parents who are contributing to a college 529 savings plan in their home state can now use up to $10,000 annually to pay for private school tuition for younger children.

You'll need to check with your state of residence if any limits go above and beyond what the federal government allows, but in general, you can spend the money from a 529 plan on private school tuition and still replace the money with contributions on a 529 plan in a tax-advantaged way.

Student Loan Interest Deduction

Most students and families likely qualify for the student loan interest deduction, enabling them to curb some costs of student loan debt.

Take the deduction under the following scenarios:

  • The taxpayer paid interest on a qualified (usually federal) student loan.
  • You are mandated by law to pay interest on your student loan.
  • Your tax filing status is not married, yet filing your returns separately from your spouse.
  • Your modified adjusted gross income is either less than $80,000 or less than $165,000 if filing as a married couple. You can still file for the student loan deduction below these income amounts, but your tax break is either reduced or taken out entirely in doing so.

It's also worth noting that you can't take the student loan tax deduction if you are on another individual's tax return as a dependent (like a college student who is on her parent's tax return as a dependent.)

You'll also need IRS Form 1098-E from your college or university to file for the deduction if you're a taxpayer (likely a college student or parent) who has paid over $600 in student loan interest.

American Opportunity Credit

This tax credit was also set to expire at the end of 2017, but Congress has extended the American Opportunity Tax Credit permanently.

This tax credit, much like the Hope Tax Credit that preceded it, allows the taxpayer to earn a tax break for all four years of college (or any four years of post-secondary school education.) The Hope Credit, which the new American Opportunity Credit is based upon, only allowed a tax break for two years of college study.

Taxpayers are eligible for the American Opportunity Credit tax credit as long as the participating college student is enrolled at least 50% of the time, on his or her way to a qualified degree or certification program during the tax year in which the credit is claimed.

The tax credit limit is $2,500 paid out for typical college costs like tuition, administrative fees, and textbooks, among other qualified costs. Claim the tax credit using IRS Form 8863, and make sure to include the college or university's employer identification number when you complete your tax forms.

Lifetime Learning Credit

This tax credit offers abundant deductions with one major caveat - you can't take both the Lifetime Learning Credit and the American Opportunity Credit in the same year, for the same participating college student.

You can, however, apply both tax credits for two different college students, which is highly helpful in U.S. families with more than one collegian in the family.

Past that barrier, the Lifetime Learning Credit also allows for a tax credit for an unlimited number of years in an accredited educational institution (as opposed to up to four years for the American Opportunity Credit.)

Financially, the lifetime learning credit is non-refundable (meaning you can't claim the tax credit if you don't owe any taxes), and offers a tax credit of up to $2,000 for the taxpayer. Claim the tax credit using IRS Form 8863.

For the 2018 tax year, a taxpayer can claim the Lifetime Learning Credit if his or her modified adjusted gross income stands at $57,000 for an individual taxpayer or $114,000 for a taxpayer filing jointly. In future years, it's advisable to check that tax year's income eligibility before taking the tax credit, as income qualification levels do change on a year-to-year basis.

Talk to a Tax Adviser to Maximize College Tax Breaks and Deductions

While you can complete your tax returns and claim the above tax credits and deductions, it's always a good idea to consult with a tax professional. He or she knows how to get the most tax breaks and deductions, based on your college spending circumstances, concerning your annual income and tax filing status.

The upside in doing so can be highly positive, and lead to you saving hundreds or even thousands of dollars on your taxes this year.