Families eligible to claim higher education tax deductions and credits can effectively use them to reduce overall college costs, yet about half of American households are missing out on the opportunity by not taking full advantage of tax breaks available to them.
In its annual report “How America Pays for College,” private student loan lender Sallie Mae found less than half of the 21 million students and families who ponied up for college tuition, fees or interest on a student loan in 2014 used tax credits and deductions as a way to help cover college costs.
“Quite frankly, if you are eligible, you don’t want to leave that money on the table,” said Rick Castellano, vice president of communications at Sallie Mae in Newark, Del.
The federal government last year provided more than $15.6 billion in education tax credits and deductions, with families receiving an average of about $1,200, according to the College Board. Sallie Mae estimates about the same amount or more of higher education credits and deductions went unclaimed.
“We found less than half of families are using tax credits and deductions as a way to lower tuition costs,” Castellano said. “Some folks just aren’t aware these tax credits and deductions are available to them.”
Two tax credits available to families with children in school — the American Opportunity Tax Credit and the Lifetime Learning Credit — are education credits that families can subtract in full from their federal income tax bill, not just deduct from taxable income.
With the American Opportunity Tax Credit, eligible families may qualify for a maximum annual credit of $2,500 per student. To be eligible, a student must be enrolled at least half-time in a degree or other recognized educational program and cannot have completed the first four years of post-secondary education before 2014.
While the American Opportunity Tax Credit is limited to undergraduate students enrolled at least half-time, the Lifetime Learning Credit can be claimed by anyone taking classes in order to acquire or improve job skills, including undergraduate, graduate and professional degree courses. Eligible taxpayers may qualify for up to $2,000 per tax return to help pay education costs.
Pittsburgh certified public accountant Howard Davis pointed out that all of the credits and deductions have restrictions.
For example, the American Opportunity Tax Credit is available to taxpayers with a joint adjusted gross income as high as $180,000. The Lifetime Learning Credit is available to taxpayers with modified adjusted gross income of less than $64,000 or $128,000 if filing jointly.
“High-income taxpayers don’t get to take advantage of these credits, unfortunately, due to the phase-out of adjusted gross income,” said Davis.
Taxpayers also can only take one of the two tax credits.
As for tax deductions, student loan borrowers are eligible for up to $2,500 in student loan interest deductions to offset income subject to tax. Available for both federal and private education loans in repayment, families with a joint modified adjusted gross income less than $160,000 qualify for this deduction.
Students and families also can use up to $4,000 in expenses for higher education to offset income subject to tax under “tuition and fees deduction.”
This deduction is taken as an adjustment to income, although an individual does not need to itemize other deductions.
Individuals can file for this deduction with a joint modified adjusted gross income of up to $160,000.
According to Sallie Mae, taxpayers can take both Student Loan Interest Deduction and also Tuition and Fees Deduction in the same year. However, if you take one of the two tax credits, you cannot take the Tuition and Fees Deduction.
On the other hand, if you take one of the credits, you may still be eligible for the Student Loan Interest Deduction.