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As inflation causes the cost of college to rise, many parents may be concerned about higher tuition bills.
However, some tax breaks can offer relief to cash-strapped families, financial experts say.
While tuition and fees remained mostly stable during the pandemic, some universities are now raising tuition by as much as 5 percent amid rising inflation and other pressures.
Also, 529 college savings plans may have lower balances after double-digit stock losses in 2022, and rising interest rates make student loans more expensive.
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While 529 college savings plans offer a tax incentive to save, and the student loan interest deduction can help after graduation, other write-offs can be limited.
“There’s not a lot going on,” said certified financial planner John Loyd, owner of The Wealth Planner in Fort Worth, Texas.
However, there are some tax credits worth exploring.
1. Tax deduction for undergraduate students
If a degree runs in the family, you’ll want to consider it American Opportunity Tax Credita break for qualified education expenses, limited to four years per student.
Here’s how it works: You can claim 100% of the first $2,000 of costs per student and 25% of the next $2,000 for a maximum credit of $2,500 per student. To qualify, you will need Model 1098-T from the school, which covers tuition and fees paid.
Plus, up to $1,000 is refundable, meaning you can claim some of the benefit even without any tax liability, a possible boost for lower income earners, said Tommy Lucas, CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
However, the more you earn, the harder it is to rank. For 2022, eligibility begins to phase out once your modified adjusted gross income exceeds $80,000 ($160,000 for couples filing jointly). You cannot claim the write-off with MAGI above $90,000 ($180,000 for joint filers).
While 529 college savings plans offer a tax incentive to save, and the student loan interest deduction can help after graduation, other write-offs can be limited.
2. Tax deduction for degrees and professional degrees
Another tax reduction, the lifelong learning creditextends to graduate studies and professional degree courses, with a value of up to $2,000 per tax return.
You can claim 20% of the first $10,000 of qualified education expenses. Although the credit is non-refundable, you can take it for an unlimited number of years. But the same income exclusions apply.
You can’t claim both credits for the same expenses, so if you’re eligible for the American Opportunity Tax Credit, you’re better off taking that one, Loyd explained. “That’s where you’re going to get the most bang for your buck.”
3. Claim a tax reduction for working
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Parents can claim the American Opportunity Tax Credit or Lifetime Learning Credit while children are dependents, but working students can also qualify for a couple of tax breaks.
Students can claim the Earned Income Tax Credit, a refundable tax break for low- to moderate-income workers.
If they can afford to save some of their income, they can also take credit for retirement savings contributions, Lucas said, which applies to up to 50% of deposits for up to $1,000 dollars for single investors.
“Essentially, you get 50 free cents on the dollar for every dollar you put into a Roth [individual retirement account],” added.
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