The federal government realizes college costs Americans a bundle, so there are tax credits and deductions available to help ease the burdenif only families are aware and take advantage of the incentives.
With April 15 just around the corner, the National Association of Student Financial Aid Administrators has just come out with a guide to help families understand the available options from credits, which can directly reduce the amount of taxes paid, to deductions that reduce the amount of income taxed.
The big money saver is the American Opportunity Tax Credit. Families earning up to $160,000 can get a credit of $2,500 per student for up to four years for a total of $10,000 knocked off their tax bill. This can offset the price of education expenses, such as tuition, fees, and books. It applies only to student pursuing a college degree or certificate.
The AOTC is set to expire in 2017. The Obama Administration's 2015 budget would make the credit permanent, which officials say provides an average benefit of $1,110 each year to 11.5 million families, according to Inside Higher Ed. Several proposals to revamp the financial-aid system and make college more affordable are floating around Congress and being promoted by student advocacy groups.
Another available credit is the Lifetime Learning Tax Credit. It allows up to a $2,000 credit to defray the cost of any kind of postsecondary education for families making up to $127,000.
For those not eligible for credits, there is the Tuition and Fees Deduction that can help trim $4,000 off a family's income to reduce its tax burden. Interest on student loan debt can also be deducted when filing.
An article in U.S. News & World Report suggests families weigh how the higher education tax credits and deductions affect their tax refund this year before setting next year's savings or distribution strategy for college expenses.
The Internal Revenue Service has helpful information tax benefits for education, including credits, deductions, savings plans, scholarships, and assistance that can be excluded from income, at a special information center on its website.