Education Tax Breaks: Easy As 1-2-3
It takes a lot of scrimping and saving to put a child through college. However, you may be able to salvage some relief on your federal tax return, although some upper-income parents are locked out. Specifically, you may qualify for one or more of three main tax breaks—but you can choose only one each year. Here are the tax break choices:
1. American Opportunity Tax Credit (AOTC): The AOTC, formerly known as the Hope Scholarship credit, recently was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015. The maximum annual credit is $2,500. Notably, the AOTC is available for each qualified student who is a member of your family—so if you have three kids in school at the same time, you may take a maximum credit of $7,500 each year that they're all in school. Also, under a recent tax law change, you now can claim the AOTC for up to four years of college for each child. And this is a tax credit, not a deduction; if you get a $7,500 credit, your final tax bill is reduced by that amount.
However, the AOTC may be phased out depending on your modified adjusted gross income (MAGI). Currently, the phaseout range is between $80,000 to $90,000 of MAGI for single filers and $160,000 to $180,000 for joint filers. Once you go above the upper limits, you can't claim the AOTC.
2. Lifetime Learning Credit (LLC): The LLC is also permanently in the tax law. But a family can claim no more than the maximum credit of $2,000 regardless of how many students it has.
In addition, the LLC also is phased out at levels lower than the AOTC. Currently, the phase-out range is between $55,000 to $65,000 of MAGI for single filers and $110,000 to $130,000 for joint filers. As a result, the AOTC is generally more popular than the LLC.
3. Tuition deduction: Parents may be able to claim a deduction for college tuition and related fees for dependent children. The deduction is either $4,000 or $2,000, depending on your MAGI for the year. For single filers, the $4,000 deduction is available for a MAGI of up to $65,000 and $2,000 between $65,000 and $80,000. Similarly, joint filers can deduct $4,000 for a MAGI up to $130,000 and $2,000 if the MAGI total is between $130,000 and $160,000. There's no deduction if you exceed the upper thresholds.
The PATH Act retroactively extends the tuition deduction for the 2015 tax year and through 2016. It could be renewed again by Congress.
Remember that you can claim only one of these three tax benefits – the AOTC, the LLC or the tuition deduction – on your federal tax return. Which to use depends on your particular situation.
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