If your son or daughter is undergoing college education currently, you are eligible to claim a few credits on your tax return. The American Opportunity Credit (formerly known as the Hope Credit) and the Lifetime Learning Credit are two of the most frequently claimed ones. Moreover, if your child has recently graduated and is repaying student loans, you can deduct the interest.
American Opportunity Credit
Renamed from the Hope Credit, the American Opportunity Credit has widened its scope. Initially, it was limited to the first two years of college, but now it applies to the first four years. Likewise, the credit has risen annually from $1,800 to $2,500. However, this credit becomes less for families with joint returns over $160,000.
Lifetime Learning Credit
The Lifetime Learning Credit is applicable beyond the initial four years of college, ideal for those pursuing graduate studies or additional education classes. Worth up to $2,000, it stands at 20% of the initial $10,000 spent on education. Note that it’s gradually reduced for single filers earning between $50,000 – $60,000 and for joint filers with $100,000 – $120,000 income.
Student Loan Interest Tax Deduction
After your child has graduated, and you cannot claim these credits, they can still take advantage of the student loan tax deduction while actively repaying their loans. This tax deduction can bring down the taxable income by as much as $2,500 or the total interest paid over the year, subject to whichever is lesser. Several criteria apply to this benefit:
– The modified adjusted gross income should fall below $75,000 for individual taxpayers (credits phase out above $60,000) and under $150,000 for joint filers (credits phase out over $120,000).
– Only loans issued exclusively for educational purposes are eligible, excluding loans from relatives or qualified employer schemes.
– Expenses should relate to a designated academic duration, with loans issued no earlier than 90 days before or later than 90 days post-semester.
– The student should have a minimum half-time enrollment in a qualifying school and program.
While the rising cost of education is undeniable, government provisions like the American Opportunity Credit or Lifetime Learning Credit offer some relief to parents of dependent college students. It’s worth noting that even if parents are repaying their child’s loans, only the child can claim the interest deduction. For self-supporting college students and recent graduates, the Lifetime Learning Credit and student loan interest deduction provide substantial aid. While these grants don’t completely offset today’s exorbitant education expenses, they do help lighten the financial load of a college education.
