Over the past three decades, college enrollment has increased by 11%, while tuition fees have soared by 200%, according to a recent report. Today’s college students will graduate in a poor job market with median student loan debt of $23,300.
Faced with such poor odds, it has never been more important for students and recent graduates to retain as much of their income as possible. Yet the U.S. Government Accountability Office reported that Americans left behind nearly $800 million in tuition tax benefits in 2009, an average of $466 per person.
With national student debt approaching $1 trillion, now is a good time to review some of the most lucrative tax breaks for students.
American Opportunity Credit. Students can claim up to $2,500 for the first four years of post-secondary education. And since 40% of the credit is refundable, that means students can recoup up to $1,000 on their refund — even though they don’t owe any taxes, according to the IRS. What is eligible: Tuition and fees, books, supplies and equipment related to the courses. Revenue: Jointly filing couples earning less than $160,000; single filers earning less than $80,000.
The Lifetime Learning Credit. Students earning less than $60,000 (single filers) or $120,000 (married, jointly filing) can claim up to $2,000 in education-related expenses.
Tuition fees and deductions. Like the American Opportunity Credit, students earning less than $80,000 (single) or $160,000 (married, filing jointly) can deduct up to $4,000 in tuition and fees on their annual tax returns. Use it while you can – this tax break is due to expire at the end of 2013 unless lawmakers extend it.
Student loan interest deduction. If you have a federal or private student loan, you can deduct up to $2,500 of interest paid on the loan as an “over the line” exclusion from your income. You do not need to itemize your deductions to claim them.
To note: College students can only claim one of the above tax credits per year, but parents who support more than one child in college can claim tax credits per student.