Financial Aid Finder

Welcome to the part IV of my series on how to reduce the cost of college.  So far I’ve given you three suggestions:

1. Graduate from college in three years rather than four

2. Go to a local community college for up to two years before transferring to a four-year university

3. Volunteer for AmeriCorps and earn nearly $5,000 toward college

This week’s tip is to reduce your college expenses by taking advantage of all available education tax credits and deductions. According to a recent survey, most taxpayers don’t even know about these tax breaks — and if they do, they aren’t using them in the most efficient manner possible. If you or your child is currently in college, education tax credits can help you to offset the costs. The best way to save money is with tax credits. Tax deductions are second best. Let me explain…

A tax deduction reduces the amount of income on which you owe taxes. A tax credit reduces the amount of taxes you actually owe, dollar for dollar. So let’s say you make $50,000 a year and pay 25% to takes. With a tax deduction of $4,000, you would now owe taxes on $46K, rather than $50, so your tax bill would go down from $12,500 to $11,500 — or $1,000. Got that? A tax deduction of $4000, saves you $1,000 come tax time.

A $4,000 tax credit, on the other hand, saves you just that: $4,000. So instead of having to pay $12,500, you would have to pay $8,5000. And if you had already paid in the $12,500 through your job’s payroll, well, then the IRS would send you a refund check in the amount of $4,000.

Since you want to apply for tax credits before tax deductions, here are the two education credits you need to know about:

1. The Hope Credit (also known as the American Opportunity Tax Credit)

• Can be used during the first two years of post-secondary education. It does not apply to 3rd, 4th or higher years of undergrad, nor to graduate school.

• Is worth up to $1,800 per student per year. The first $1,200 of qualified tuition and fees earns you a 100% credit; the next $1,200 gets you 50% (or $600). If you spent more than $2,400 on tuition and fees, there is no additional credit. If you spend less than $1,200, you only earn a credit for that which you do spend.

• Eligible students must be enrolled at least half-time.

• If you get arrested for felony possession during your schooling, you lose your tax credit. (Seriously!)

The Lifetime Learning Credit

• Can be used at any point in your educational career — undergraduate, graduate, job training, etc.

• Is worth 20% of the first $10,000 in post-secondary tuition and fees (i.e. a maximum of $2,000). Any tuition above $10,000 is not eligible for the tax credit. If you pay less than $10,000 in tuition and fees, your tax credit will be proportionately lower.

When can’t you claim an education tax credit?

• If you have already received on credit in a tax year, you can not also receive the other one. Therefore, it is important that you carefully calculate which credit is more beneficial before filing your taxes.

• If your parents still claim you as a dependent on their taxes. They, however, can get the credit — even if you’re the one who footed the tuition bill.

• If your Adjusted Gross Income is over $48,000 (or $96,000 for married filing jointly).

College Tuition Deduction

If you are not eligible to claim either the Hope or the Lifelong Learning Tax credits, you may still be able to reduce your educational costs with the college tuition deduction.  Here’s the basics you need to know:

• Deduct up to $4,000 of total allowable expenses (don’t have to be itemized)

• Phases out starting at $65,000 per year ($130,000 for couples filing jointly)

• Cannot be applied to any costs paid with funds from tax-deferred college savings vehicles (e.g 529 Plans or Coverdell ESAs)

Are you taking advantage of tax credits and/or tax deductions? How much have you saved on your college costs?

Tags: college tax credits, reduce cost of college, reducing college costs, tuition tax deductions