If your child is currently in college, you may be able to receive several credits on your tax return. Two of the most common are the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit. In addition, if your child has recently graduated from college and is paying back student loans, the interest is also deductible.
American Opportunity Credit
The American Opportunity Credit, not only is a new name for the Hope Credit, but it has also been expanded. While it used to only be available for the first two years a student was in college, it has now been increased to cover the first four years of college. In addition to the length of time available, the amount of the credit has also increased from $1,800 per year to $2,500 per year. This credit is phased out at $160,000 for joint returns.
Lifetime Learning Credit
The Lifetime Learning Credit applies after the first four years of college for those in graduate school or continuing education classes. This credit can be worth a maximum of $2,000. It is credited at 20% of the first $10,000 of education, up to a maximum of $2,000 and is phased out at $50,000 to $60,000 annual income for single filers and $100,000 to $120,000 for joint filers.
Student Loan Interest Tax Deduction
Once your student has completed college and you can no longer claim these credits, your child who is actively paying on their student loans can benefit from the student loan tax deduction. The tax can reduce the amount of income subject to tax by as much as $2,500 or the total interest you paid during the year, whichever is smaller. There are several rules that generally apply to this:
-Your modified adjusted gross income must be below $75,000 if a single filer (though the credit begins to be phased out at $60,000 modified adjusted gross income), or $150,000 if filing jointly (with the credit being phased out beginning at $120,000 when filing jointly).
-The loan must have been taken out solely for education purposes, and it cannot be a loan from a relative or a qualified employer plan.
-The expenses must be related to a specific academic period or the loans are dispersed no more than 90 days before the start of the semester and no later than 90 days after the conclusion of the semester.
-The student must have been enrolled at least half time in an eligible school and program.
While there is no doubt that the price of education is outpacing inflation, the government does allow small ways to lower your overall cost. For parents of dependent children still in college, you may be able to receive the American Opportunity Credit or Lifetime Learning Credit. (Note, even if you are paying back your child’s student loans, the child is the one who can claim the interest deduction.) Independent college students and recent graduates can benefit from the Lifetime Learning Credit as well as the student loan interest deduction. While these credits don’t make up for the high cost of education today, they do help relieve some of the burden of paying for college.