If this tax season holds true to form, thousands of families with children in college will leave a chunk of money on the table.
The reason: failure to claim higher education tax credits and deductions designed to take some of the bite out of rising college costs.
Student-loan lender Sallie Mae reported in its 2014 study on “How America Pays for College” that only 42 percent of the 20 million parents and students who shelled out money for college took advantage of the education tax breaks and benefits last year.
“Most of us aren’t tax experts, and figuring out tax credit eligibility, plus taking the time to learn how to claim them, can be complicated,” said Sallie Mae spokesman Rick Castellano. “There’s also the issue of awareness.”
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The federal government last year provided more than $15.6 billion in education credits and deductions, according to the College Board. That averaged $1,200 per recipient, the higher education research organization said.
Yet, Sallie Mae estimates that about the same amount — or nearly $16 billion — went unclaimed.
If you are still working on your taxes, don’t overlook four key higher education items, starting with the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits are big because they can be subtracted directly from the final tax you owe.
To qualify for the American Opportunity credit, the student must be enrolled at least part time in an undergraduate degree or other recognized educational program and cannot have completed the first four years of postsecondary education before 2014. The credit can be applied to tuition and fees along with course-related books and supplies.
The American Opportunity credit is available to taxpayers with joint adjusted gross income as high as $180,000, or $90,000 for single filers.
The other educational credit, Lifetime Learning, can be tapped by a broader set of students to help pay for undergraduate, graduate and professional degree courses, including courses designed to improve job skills. There is no limit on the number of years an individual can claim the credit.
It’s available for people with modified adjusted gross income less than $64,000, or $128,000 for joint filers.
Taxpayers can take only one of the two tax credits for the same student in any one year.
Two other key deductions reduce your taxable income though they don’t guarantee a smaller final tax bill. One allows student loan borrowers to take up to $2,500 in interest deductions for both federal and private education loans to offset income subject to tax. It’s available for families with joint modified adjusted gross income of less than $160,000, or less than $80,000 for single filers.
Students and families can also use up to $4,000 in higher education “tuition and fees” expenses to offset income subject to tax. Individuals can file for this deduction with joint modified adjusted gross income of up to $160,000, or $80,000 for single filers.
Taxpayers can take both higher education deductions in the same year. However, if you take one of the two credits, you cannot take the tuition and fees deduction. But if you take one of the credits, you may still be eligible for the student loan interest deduction.
For further details on the education credits and deductions, especially the section on “no double benefits allowed,” check out Internal Revenue Service Publication 970 on tax benefits for education.
You can also turn this tax situation into a learning experience, thanks to an online exercise created by Sallie Mae and designed for parents, students and teachers called “Let’s Play, Can You Claim It?”
And if you’re counting the days before your refund check arrives in the mail, here’s one other tax tip. Stash the cash in a state-sponsored 529 college savings plan, which offers tax advantages.
With refunds averaging close to $3,000 in recent years, a windfall like that could put another dent in higher education costs.
To reach Steve Rosen, call 816-234-4879 or send email to firstname.lastname@example.org.