Want just the straight facts on taxes and paying for your student’s education? Read what guest blogger Bob Sherman has to say about what to consider when filing your taxes.
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The Internal Revenue Service allows parents of college students to either deduct a portion of their college expense from their income, which reduces the amount on which they pay taxes, or take a tax credit in a certain amount that is subtracted directly from your tax bill. The four tax benefit options are:
Tax Deductions
1. Tuition and Fees Deduction of up to $4,000.
2. Federal Education Loan Interest Deduction of up to $2,500.
Tax Credits
3. American Opportunity Tax Credit (AOTC) up to $2,500.
4. Life Learning Tax Credit up to $2,000.
A tax deduction works this way: if you subtract the Tuition and Fees Deduction of $4,000 from your Adjusted Gross Income and are in the 20 percent income tax bracket, the tax reduction would be 20 percent of that $4,000, or $800. So if your tax bill was $10,000, it would be reduced down to $9,200.
A tax credit works this way: if you decide to take the American Opportunity Tax Credit (AOTC) and are eligible for the maximum $2,500, you can deduct that amount from your $10,000 tax bill, reducing it down to $7,500.
Well, taking the AOTC is a no brainer. Why even bother talking about deducting $4,000 from my income? Because.
The American Opportunity Tax Credit, like every section of the tax code, comes with restrictions. Did I forget to tell you that you can only use it for four years? Given that 30 percent or more of students take up to six years to graduate, you’ll be thankful down the road for that $800 off your taxes. And worse, if you paid for college using the tax exempt earnings of a 529 plan you’ve been putting money into over the years, oops. Sorry, only one tax exemption at a time. And if you are filing jointly and your Modified Adjusted Gross Income (MAGI) exceeds $160,000 that could be a problem too.
So what is the best plan for you? The best plan is to consult a knowledgeable tax preparer.
Guest blogger Bob Sherman is the author of Surviving the Cost of College. Consult his website, survivingthecostofcollege.com for more great advice. An extended version of this post can be found here.
