Education, especially college tuition, can be a big financial burden for students and their parents. In the 2021–2022 school year, the average tuition and fees for a full-time undergraduate student in a public four-year out-of-state institution would have been $27,650, which is $410 higher than in 2020–2021. While you can’t do much about the rising costs, the ability to deduct college tuition fees from your taxes could be a significant relief. Is college tuition tax-deductible?
Unfortunately, the tuition and fees deduction ended on December 31, 2020. However, that doesn’t mean that you can’t deduct eligible expenses. According to the IRS, students or their parents can benefit from tax breaks, including the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). However, you can only use one at a time.
What are the eligibility criteria for tuition fee deduction?
These deductions are above-the-line, which means you don’t have to itemize deductions to claim them. The deduction can only be claimed for qualified education expenses for higher education. You can’t deduct expenses that you paid for with a scholarship or another tax-free award.
The costs must be incurred for yourself, your spouse, or your dependent who must be enrolled at an eligible institution. Couples who are married but filing separately aren't eligible for these deductions. Similarly, someone who's claimed as a dependent on someone else’s tax return can't claim this deduction.
How much you can claim as a deduction depends on your filing status and your MAGI (modified adjusted gross income).
The American Opportunity Tax Credit has a maximum deduction of $2,500.
The AOTC provides a maximum deduction of $2,500 per eligible student for each of the first four years of higher education. In addition to tuition costs, AOTC also covers qualifying materials and fees. AOTC is a refundable tax credit, which implies that it can increase the size of your tax refund even if it reduces your tax liability to a negative number.
According to the IRS, to claim the full credit, your MAGI must be $80,000 or less ($160,000 or less for married filing jointly). You can't claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
The Lifetime Learning Credit has a maximum deduction of $2,000.
There are a few differences between LLC and AOTC. For one, LLC isn't a refundable tax credit. Unlike AOTC, it can be claimed for undergraduate education, graduate school, or technical school.
The LLC can be claimed for any number of years. The LLC deducts 20 percent of the first $10,000 of qualified education expenses, up to a maximum of $2,000 per year. The IRS specifies that you can’t claim this credit if your MAGI is $69,000 or more ($138,000 or more if you file a joint return).
Also, you can take a student loan interest deduction. For 2021 taxes, you can deduct the amount you paid in interest for your student loans, up to $2,500, which is the maximum deduction.
One way to lessen the financial burden of higher education is to go for college savings plans such as 529 College Savings Plans. They let you contribute toward investment portfolios with underlying mutual funds. These are tax-advantaged plans that help investors invest money for future education costs.