Tax Credits and Deductions for College Students 

tax deductions and credits for college students
August 10, 2023

College can be an expensive venture for students and their families., However, when it comes to your annual taxes, higher education can have some perks that will positively impact your bottom line.  

While deductions and credits can vary widely and change every year, taking a closer look at what you may be able to claim on your tax return is worth the effort. A tax compliance and planning expert like Waters Hardy can take the reins before, during, and after your educational efforts. Our professional tax experts always make   sure you make the most out of these tax-related benefits. The smartest move for soon-to-be and new students is to reach out to an expert in tax services (Dallas-based or beyond), to understand the options and benefits when it comes to seeing a noticeable difference in the taxes you owe year after year. 

In the meantime, consider these deduction and credit options that can potentially lighten the load when it comes to all of your college expenses. From annual tuition to essentials like books and computers, here are a few tax planning tips that will make the burden of paying for a higher education a little easier to bear. 

 Differences Between Tax Credits Versus Tax Deductions 

It’s helpful to have a foundational education on credits versus deductions before considering your various college-related options for your annual tax return. Simply put, deductions can reduce the amount of your income before you calculate how much you owe every year.

On the other hand, tax credits are applied to the total amount of tax, not the total amount of income, so they can have a big impact on tax payments and/or refunds. In fact, certain credits may give you a refund even if you don’t owe any tax, and your tax planning partner can guide you through these unique situations that can put a lot of money back into your pocket. 

Types of Deductions and Credits for College Students to Consider 

Bear in mind that the following is just a sample of the opportunities that may be available. Reach out to Waters Hardy for a consultation on your unique financial situation to explore opportunities that will work best for you. 

The American Opportunity Tax Credit 

The American Opportunity Tax Credit allows taxpayers to lower their annual bills by up to $2,500 in undergraduate education expenses. Essentially, the American Opportunity Tax Credit lets filers claim up to $2,000 on tuition, school fees, books, and supplies, but not living or travel expenses, plus 25% of the next $2,000 spent on the above expenses, for a combined total of $2,500. 

There are some caveats to claiming this credit. Students can claim the credit on their own taxes for up to four years, provided they are not claimed as a dependent by someone else, like their parents. Meanwhile, parents can also claim this credit if they are providing for their child’s education. (In other words, two separate tax filers can’t claim this credit at once.) 

There is an income threshold for this credit as well. The full credit can be claimed if your modified adjusted gross income is around $80,000 or less and $160,000 or less if you file your taxes jointly. (Bear in mind that these figures can change from year to year.) If you earn more than $90,000 (or $180,000 for joint filers), this credit can’t be claimed. 

The Lifetime Learning Credit 

The Lifetime Learning Credit is similar to the American Opportunity Tax Credit, but there is a little bit more flexibility. With the Lifetime Learning Credit, students or parents can claim 20% of the first $10,000 paid towards tuition and fees for a maximum of $2,000 per year.

The good thing about the Lifetime Learning Credit is that it applies to undergraduate, graduate, and non-degree or vocational students, (so long as the educational efforts are improving job skills), and there is no maximum number of years that this credit can be claimed. As such, it’s a good fit for graduate students or students taking new or other courses after they have claimed four years of the American Opportunity Tax Credit in the past. 

The Student-Loan Tax Deduction 

The student-Loan Tax Deduction is a good option for students before and after they have gone to college, as up to $2,500 in student-loan interest can be deducted annually if an individual’s modified adjusted gross income is less than $65,000, (and $135,000 if you are married and filing jointly). The deduction phases out with higher income levels and is not available for individuals who earn more than $80,000, and joint filers who earn more than $165,000. 

Other Options for Credits and Deductions on Your Tax Return 

The three options above are arguably the most popular options for college students. However, there are numerous other opportunities for students to save for college, manage education expenses, and pay off student loans after they graduate. The IRS has a complete 79-page guide on Tax Benefits for Education that helps explain some of these tax scenarios and answer questions on some of the more frequently asked questions about tuition, student loans, income thresholds, and other common queries.  

The best way to save money on your tax return when it comes to college education is to start with an expert. 

Tax Planning for College Students With Waters Hardy

Don’t just do an online search for “tax professional near me” and hope for the best. Instead, start with a consultation with a tax planning expert with decades of experience who can help answer all of your questions and miles more. 

At Waters Hardy, we specialize in assisting individuals and families in all stages of life, especially the college years. Whether you are just starting to save for a child’s education or want to whittle down years of student loan debt, we’re your best resource to navigate the tax planning process every step of the way. 

Let’s discuss more about your unique financial challenges and how we can help. With Waters Hardy as your resource, you can look forward to successful college years that won’t result in extra financial burdens down the road.  

Contact us today!

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