Tax Deductions for College Students (2022)
A couple of years back, we made a YouTube video covering some of the most popular tax breaks available for college students and parents. Well, I thought it was about time that we dust that bad boy off and update you on the latest and greatest when it comes to tax deductions for college students. Let's see what's still relevant and the benefits you might be able to take advantage of this tax season.
American Opportunity Tax Credit (AOTC)
To review: the AOTC is a tax benefit related to money that has been paid for college expenses. As it states in the name, this is a tax credit that directly reduces the tax that you owe dollar for dollar. On top of that, forty percent of the credit may be refundable. For example, if your tax owed before the credit was a thousand dollars and your AOTC amount is two thousand dollars, you could be refunded up to $800, which is 40% of $2,000.
How much is the credit? The maximum credit allowed is $2,500 per student. This amount represents 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000 of qualified education expenses. That means you would have needed to pay out of pocket (or take out student loans) of at least $4,000 to claim the full amount of the credit.
What are qualified education expenses? For this credit, it means tuition and fees and books. It does not include room and board, health insurance, or anything like that.
You must also have been enrolled in school at least half-time in a degree-seeking program to be able to claim the credit. The law also requires that your school give you a form 1098-T, which your school should provide you by January 31st, assuming they're following the rules. We actually made an entire video explaining the 1098-T that you can check out here.
Who can claim the American Opportunity Tax credit? Generally, it's whoever's claiming you as a dependent on their tax return. More often than not, that means your parents.
What are some exceptions to keep in mind? You can claim this credit for a maximum of four years, so if you've been in school longer than four consecutive years and you or your parents have taken this credit on your behalf for each of those four years, you can't take the credit. Also, there are income limitations, so if you or your parents make more than $180,000 of income if their filing status is married filing jointly or more than $90,000 if single, you cannot claim the credit. You also cannot claim the AOTC if your tax filing status is married filing separately. Unfortunately, you also can't claim the credit if you're a non-resident alien or if the student has been convicted of a felony drug conviction.
Be careful claiming the AOTC. Make sure you are qualified before claiming the credit. Be sure to keep copies of all the documents you used to determine if you are eligible and determine the amount of your credit. If the IRS audits your return and finds your AOTC claim is incorrect, and you don't have the documents to show you qualified, you must pay back the amount of the AOTC you received in error with interest. The IRS may also charge you an accuracy or a fraud penalty. Or, you can be banned from claiming the AOTC for two to ten years.
Lifetime Learning Credit (LLC)
The lifetime learning credit is another tax benefit related to money that's been paid for college expenses. Again, this is a tax credit, which directly reduces the tax you owe dollar for dollar. However, unlike the AOTC, this credit is not refundable, meaning it cannot trigger a refund.
How much is the credit? Unlike the AOTC, the maximum credit allowed is $2,000 per return, not per student, but per return this time. This amount represents 20% of qualified education expenses up to $10,000. So, you'd need to have $10,000 of qualified education expenses paid to get the total $2,000.
What are qualified education expenses? Just like the AOTC, it's just tuition and fees and books, so no room and board, no health insurance, etc. However, unlike the AOTC, you don't have to be in a degree-seeking program to claim the credit. You can claim the lifetime learning credit for courses you take to acquire or improve job skills, even if it doesn't lead to a degree. Again, you must have received your form 1098-T from your school, which they give you by January 31st.
Who can claim the credit? Like before, whoever's claiming you as a dependent on their tax return is the one taking the tax credit. Unlike the AOTC, you can claim the Lifetime Learning credit for unlimited years. This makes it great for people who may go back to school or get an advanced degree. Also, unlike the AOTC, the income limits on this credit are lower. For 2021, the limit is $138k for married filing jointly and $69k for single filers. This limit is adjusted annually for inflation. Again, you can't take the credit if you are married filing separately.
You can claim either the AOTC or the lifestyle learning credit in a given year, but not both. No double-dipping is allowed.
Student Loan Interest Deduction
The student loan interest deduction is a tax benefit related to student loan interest that's been paid. Unlike the two tax credits that we discussed earlier, this benefit is a deduction, which reduces the amount of your income subject to tax.
How much is the deduction? It's the actual amount of interest that you paid within the year, subject to a cap of $2,500. Your student loan servicer will issue you a 1098-E (which is different from the 1098-T that we discussed earlier), showing how much interest you paid throughout the year. With the student loan forbearance that many of us have been in for the past two years, some people haven't made any payments that would qualify them for the student loan interest deduction. However, even if this forbearance continues, if you have outstanding student loan interest and you can afford to make a payment to reap the benefit of the student loan interest deduction, that's something you might want to consider.
Who can claim the student loan interest deduction? Short answer: whoever took out the loan. For example, my dad took out a Parent PLUS loan for me when I was an undergrad, so even though we've since paid the loan off, my dad was the one getting the potential benefit of the loan interest deduction on his tax return because the loan was in his name. Borrowers can claim the student loan interest deduction for an unlimited number of years. The 2021 income limits are $170k for married filing jointly and $85k for single people. For 2022, those numbers will be $175k and $85k, respectively. And similar to the credits we talked about, you can't take the student loan interest deduction if you're married and filing separately.
You CAN take this deduction in conjunction with either the AOTC OR the Lifetime Learning credit.
Tuition and Fees Deduction
This part will be short because, well, it no longer exists! After much back and forth, this deduction has been repealed for tax years after 2020. Instead, the government increased the income limits on the lifetime learning credit to help filers who previously took the tuition and fees deduction credit qualify for the lifetime learning credit instead.
For more information on tax benefits for education, check out the IRS Publication 970 (that's hyperlinked, btw!)
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