How to offset university fees with education tax credits
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College is expensive. Luckily, you have a number of ways to offset the costs, from benchmarking the best rates on student loans to using tax breaks to offset education expenses.
If you need to cover the cost of higher education, here’s what you need to know about education tax credits and other education-related tax breaks.
Education tax credits can help defray costs while you study. But if you’ve already graduated and are looking for a lower interest rate or smaller monthly payment, refinancing a private student loan may be worth considering.
Credible, it’s easy to view private student loan refinance rates from several lenders.
What are education tax credits and how do they work?
You are probably familiar with tax deductions, such as the standard deduction or the mortgage interest deduction. The value of a tax deduction depends on your tax bracket. For example, if you’re in the 24% tax bracket and you get a $1,000 tax deduction, you’ll save about $240 on your tax bill.
Tax credits are more valuable because they reduce the tax you owe, dollar for dollar. For example, if you owe $1,000 in tax but can claim a tax credit of $1,000, your tax bill is zero.
Refundable tax credits are even more valuable because they can create a tax refund. For example, if your tax account is $1,000 and you can claim a refundable tax credit of $2,000, you will receive a refund of $1,000.
Two main federal education tax credits are available, and your ability to claim these credits depends on several factors, including the amount and type of college expenses you had during the tax year, your level of registration and your income. Depending on where you live, you may also qualify for state-level tax credits.
Education tax credits i.e. US Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is worth a maximum of $2,500 per student.
This is a partially refundable credit, which means that if it reduces the amount of tax you owe to zero, you can get up to $1,000 of the credit back.
Qualifying education expenses for the AOTC include tuition, required fees, and course materials necessary for participation.
The US Opportunity Credit is the more generous of the two federal education tax credits, but it also has the strictest requirements. To claim the credit, you, your spouse or your dependent must:
- Be enrolled at least half-time and in a degree or credential program
- Be in the first four years of undergraduate study (for example, freshman to senior year of college, but not graduate school)
- Do not have a conviction for drug trafficking
The AOTC also disappears if your income is too high. To claim the full credit, your modified adjusted gross income, or MAGI, must be $80,000 or less ($160,000 or less if you file a joint return). If you are single with MAGI between $80,000 and $90,000, or married with MAGI between $160,000 and $180,000, you can apply for a reduced credit. If your income exceeds these upper limits, you cannot claim AOTC at all.
Lifetime Learning Credit (LLC) is worth up to $2,000 per return, and no portion of this amount is refundable.
The definition of qualifying expenses for the LLC includes tuition and required fees. But it only covers course materials, such as books, supplies, and computer equipment, if the cost of those materials must be paid to the college or university as a condition of enrollment or attendance.
The LLC is not limited to the first four years of higher education and does not require the student to be enrolled at least half-time or pursuing a degree. This makes it accessible to graduate students and people taking college courses to improve their professional skills.
For the 2021 tax year (returns filed in 2022), your MAGI must be less than $80,000 ($160,000 for joint filers) to claim the full LLC. If your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if filing jointly), your credit is gradually reduced. You cannot claim the LLC at all if your MAGI is above these upper limits.
Eligibility for tax breaks is often tied to income. But the income requirements for refinancing your student loans can be more flexible. If you are considering refinancing your student loans to save money, you can compare rates from multiple lenders using Credible.
You should receive a Form 1098-T from your school by the end of January following the year in which you paid eligible expenses. You can use Form 1098-T to claim an education tax benefit or both by completing Form 8863 and attach it to your tax return.
Just keep in mind that you can’t “double down”. For example, if you are claiming the AOTC for yourself or for a dependent child, you cannot claim the LLC using the same student’s education expenses.
Other Ways to Offset College Tuition
Education credits aren’t the only way to make college more affordable. Consider these strategies to help reduce the financial burden:
- Student loan interest deduction — If you take out loans to pay for your college education, you can deduct up to $2,500 in interest on student loans paid each year. But your deduction can be phased out or eliminated if your MAGI exceeds $70,000 ($140,000 if you’re married and filing jointly).
- Federal Direct Consolidation Loan — If you have federal student loans with several different loan officers, a Direct Consolidation Loan can simplify repayment by grouping them into a single loan with a single monthly payment. While there’s no guarantee you’ll get a lower interest rate, consolidating can lower your overall interest rate or save you money by replacing variable rate loans with fixed rate loans.
- Income Oriented Repayment Plan — A income-based repayment plan helps make your monthly student loan payment more affordable based on your income and family size. Depends on type of repayment plan you are under, you may be able to have your loan balances forgiven if they are not fully repaid after 20 or 25 years. But an income-driven repayment plan won’t lower your interest rate or lower your costs.
- Private student loan refinancing — Refinancing your private student loans can also help reduce the cost of education if you are able to secure a lower interest rate. Just keep in mind that refinancing federal student loans into a private student loan means you lose your access to federal loan benefits, like income-driven repayment plans and student loan forgiveness programs.
You can learn more about private student loan refinancingand compare rates from multiple lenders by visiting Credible.