Paying for college tuition? There’s a credit for that

Now that your loved one is off to school, it’s time to begin paying the tuition and other related expenses. We have a number of tax-advantaged strategies you can consider to help with the high cost of college.

A couple tuition tax credits are available for those paying college tuition and fees.

You can take an American Opportunity Tax Credit (AOTC) of up to $2,500 per student for the first four years of college—a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school—a 20% credit for up to $10,000 in tuition and fees.

The AOTC is 40% refundable. That means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

Both credits are phased out for higher-income taxpayers. The AOTC is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The phase-out range for the Lifetime Learning credit is adjusted annually for inflation. For 2022, the Lifetime Learning credit is phased out for marrieds filing jointly with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000.

Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an AOTC or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.

Please contact your tax advisor today to learn more.

Read about scholarships and other gifts here

Read about student loans here

Read the latest about student loan forgiveness here

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