As mentioned in Part 3, there are several tax benefits for college students, including:
- American Opportunity Credit
- Lifetime Learning Credit
- Deduction for tuition and fees
- Deduction for student loan interest
Let’s start by talking about the difference between credits and deductions.
- Deductions reduce your income, which reduces the amount of tax you owe by a percentage, based on which tax bracket you’re in. For example, a $100 deduction saves $15 in taxes for someone in the 15% tax bracket.
- Credits reduce the amount of tax you owe dollar-for-dollar.
Most of the time, a credit is better than a deduction.
For further reading about the topic of tax calculations and how tax credits work, see these posts:
American Opportunity Credit
This is the biggest tax credit available for college expenses. Here are the basics.
- Available for students in their first 4 years of college
- You may be able to get a credit of up to $2,500 for college expenses, such as tuition, books, supplies – and even computers
- STUDENTS CANNOT CLAIM THIS CREDIT IF THEIR PARENTS CLAIM THEM AS A DEPENDENT!
- Amounts paid with scholarship funds don’t count toward the credit
- As you can probably tell by the highlighting, number 3 is the most important thing to be aware of with the American Opportunity Credit.
Lifetime Learning Credit
This credit will typically be claimed by people in graduate school, or taking classes part-time after the first 4 years of college.
The credit is 20% of college expenses, up to the first $10,000 of expenses (so a maximum of $2,000).
In the next part, we’ll get into complications you could run into when filing, such as income from multiple states.