What are the Best Ways to Save on Taxes When Paying for College?
Hollis, NH Resident Seeks Help
The American Opportunity Tax Credit (AOTC) allows a maximum $2,500 per child per year for those paying for an undergraduate tuition. This credit can only be used for qualifying expenses that are not being paid with a 529 distribution. The Lifetime Learning Credit offers a maximum credit of up to $2,000. The Lifetime Learning Credit is not restricted to undergraduate study and can be used in graduate programs as well.
A Hollis resident was looking for ways to save on taxes, while footing the bill for his daughter’s college tuition. He sought the advice of Merrimack Tax Associates.
Tax Credit Eligibility Based on Income
The American Opportunity Tax Credit is eventually phased out for those with higher incomes. To receive the full tax credit, married couples filing jointly cannot have an income that exceeds $160,000. Those with income between $160,000 and $180,000 can receive partial credit, and those with an income exceeding $180,000 will not be eligible for this tax credit. Single filers with income between $80,000 and $90,000 are eligible for partial credit, with incomes over $90,000 ineligible.
The Lifetime Learning Credit has a lower threshold with partial credit for couples filing jointly with income between $111,000 and $131,000. Single filers with income between $55,000 and $65,000 will receive partial credit. Any income higher than this is not eligible for this tax credit.
Student Loan Interest as a Tax Deduction
If you take out a student loan to pay for college, the interest that you pay on the loan is tax-deductible up to $2,500 per tax return. Just like the tax credit, this eligibility is phased out for higher incomes. Joint filers can take advantage of this student loan interest deduction with income under $130,000 and partial credit between $130,000 and $160,000. Single filers with income between $65,000 and $80,000 may receive a partial credit. It is important to note the credit is only on interest, not the entire loan.
The Hollis resident now has a better understanding of how to take advantage of tax credits available to those funding higher education.