Tax Breaks That All College Students Should Know About

Wed, Aug 1, 2012

Internship Uncategorized

College has become so difficult to afford that many students and their parents are wondering if it’s even possible. The downturn in the economy has affected millions of Americans, and there seems to be no relief in sight for students. Financial aid debt continues to rise, the future of interest rates is murky, and there are fewer and fewer grants and scholarships being offered by federal, state or private institutions. That means it is up to you to ferret out any possible ways to turn the tide even slightly in your favor. It may be surprising to most people, but the Internal Revenue Service could make it easier for you and your parents to afford your college education. There are a wide number of tax breaks available to give families a little extra money to put towards education, and the majority of students will qualify. And if your parents pay college expenses for you, claiming you as a dependent, then they can include those breaks on their tax return. Here are some of the tax breaks that all college students should know about.

The IRS offers two tax breaks for nearly every single college student to use towards their educational expenses. The first is called The American Opportunity Tax Credit. Formerly referred to as the Hope Credit, this program will give you a 100% tax credit on the first $2,000 you spend on your college education. The IRS follows that up with a 25% credit on the next $2,000 you spend. Of course, your tuition and expenses will be much higher than that, but if your break it down that program can put $2,500 back in your parents’ pockets. Keep in mind that you can only claim this credit during the first four years of college, and you must carry a schedule that’s at least half-time. That means no credit for graduate school, and no credit for part-time education. It’s also not going to be an option for families that have more than $160,000 of income declared on their tax filing.

If you find you’re not eligible for that credit, take a look at the Lifetime Learning Credit, another option offered by the IRS. It’s not quite as robust as the American Opportunity Credit, as it will give you back 20% of any tuition and related fees on up to $10,000 of education expenses. Do that math and you’ll see this program is capped at $2,000 for each student. While the amount of credit is obviously lower, the Lifetime Learning Credit is much easier to qualify for. You can use it for whatever number of years you like, and it doesn’t matter what size course load you are carrying. The income limit is also much lower, starting to kick in at around $104,000 for your parents, if they file jointly. You’ll also be able to use the credit for any course materials, even if you don’t purchase them directly from your school.

On top of these credits, there are ways to deduct certain tuition-related expenses on your taxes. Depending on the amount of money you make in a year, you can deduct as much as $4,000 for college expenses. That’s pre-taxed, so it will lower your overall income. Anyone who has ever experienced IRS wage garnishments knows how important that can be. Of course it’s still not as good as a credit, as you only receive a percentage back based on your tax bracket, but it will still keep money from flying out the door. It also features a higher income threshold than either of the credits, and can be utilized for graduate school if need be.

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