College is expensive. The latest figures from the University of Wisconsin–Madison show that the average annual cost of tuition and fees was over $11,000 for in-state students and almost $39,000 for out-of- state students. Additionally, these amounts do not include room and board, books, supplies, transportation, and other expenses that a student would likely incur.
Two Tax Credits
Fortunately, even if you do not qualify for federal grants, the federal government offers two sizable tax credits for higher education costs that you may be able to claim:
The American Opportunity Credit (AOTC)
The AOTC generally provides the biggest benefit to most taxpayers. This credit provides a maximum benefit of $2,500, calculated as 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. In other words, once you have $4,000 of eligible expenses, you qualify for the maximum credit. However, it is important to note that the credit applies only to the FIRST four years of postsecondary education and is available only to taxpayers whose eligible students attend school at least half time.
Tuition, fees, and required course materials qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:
- Between $80,000 and $90,000 for unmarried individuals, and
- Between $160,000 and $180,000 for married joint filers
The Lifetime Learning Credit (LLC)
The LLC equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.
The LLC can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. Therefore, the credit works well for graduate studies and part-time students who take a qualifying course at a local college in order to improve job skills. It applies to tuition, fees, and required materials.
This credit is also subject to phaseouts based on MAGI, and the threshold is a bit lower than the AOTC. For 2019, the MAGI phaseout ranges are:
- Between $58,000 and $68,000 for unmarried individuals, and
- Between $116,000 and $136,000 for married joint filers
Note: You cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student or for the same expense in the same year.
So, which tuition tax credit is right for you?
A number of factors need to be weighed before determining the answer to that question. With planning in mind, several tax favored saving or payment methods can be coordinated to make your education dollars go further. Contact us for help in determining your tax advantaged options to save or pay for college.