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Tax Concerns for the College Bound: Part 2 – Tuition, Fees, and Course Requirements

Regardless of how they are paid, via loan or out-of-pocket cash, there are education credits that are available for tuition, fees, and other course requirements.  Not everyone will qualify for these credits but if you do, they are advantageous to your tax situation.

These credits may be claimed by the student or the student's parents.  If a student is claimed as a dependent by their parent, then only the parent may claim the education credit. If a parent chooses not to claim the student as a dependent, then only the student may qualify for the credit.

Tax law allows for qualifying expenses paid by the student to be treated as if they were paid by the parent (and vice versa) for calculating the education tax credits.

The first of the education credits is the American Opportunity Credit.  Only expenses incurred in the first four year of the student's undergraduate studies will qualify for this credit.  To maximize this tax credit the student must have paid a minimum of $4,000 in tuition, fees, and course requirements and to have attended school at least half-time in a degree program.  The credit is calculated as a 100% of the first $2,000 of expenses and 25% of the next $2,000 for a maximum credit of $2,500.  The best thing about this credit is that it is 40% refundable (subject to certain exceptions) which allows for a reduction of tax liability and a refund if no liability is due.

The second education credit is the Lifetime Learning Credit. Students may qualify for this credit for both undergraduate and graduate work and are not required to be in a degree program. This credit is nonrefundable but will reduce the amount of tax you owe.  The maximum credit is $2,000 per tax return calculated as 20% of education expenses up to $10,000.

There is also a deduction available for education expenses called the Tuition and Fees Deduction.  This is a deduction of up to $4,000 of expenses before calculating AGI.

Each student may claim one of these education incentives but not more than one. All options are subject to AGI thresholds.

 

Travel

In most cases, travel as a form of education is not deductible. However study-abroad programs as a part of the tuition in a degree seeking program may qualify as education expenses allowable for education credits. Please consult your tax advisor for your specific situation.

 

Once a student begins college it is advisable to contact your tax preparer with any questions about the deductibility of education expenses to make sure that the law is applied correctly to your tax situation and to mitigate tax surprises.  For any students who plan to work while attending school please see part 3 of our College Bound series: Working Students.

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