Winter brings lots of things to look forward to, like skiing and fires in the fireplace. For most of us, preparing to file a tax return is not one of those things.
With that in mind, it might be a good time for a quick refresher on all those education tax credits and deductions that can save families with college students money. You should take advantage of your options now, especially as some may not be available next year if Congress doesn't act -- for example, the tuition and fees deduction expired at the end of 2013.
1. American Opportunity Credit: This one can be a biggie, especially if more than one person in your household was pursuing a degree this year. The credit is up to $2,500 in qualified education expenses for every student who was enrolled in one of their first four years of postsecondary education during the tax year.
The difference between a credit and a deduction is that while a deduction reduces the amount of income you are taxed on, a credit actually reduces the amount of tax owed -- which can have a greater impact on the bottom line. There's a gradual phaseout of the credit for joint filers starting with an income of $160,000 and $80,000 for single filers.
[See ways to save money while in college.]
2. Student loan interest deduction: Probably one of the better known higher education tax benefits, the student loan interest deduction allows you to deduct up to $2,500 in interest paid on a qualified student loan during the tax year.
Most student loans count as long as they were used to pay for higher education expenses and are a more traditional type of loan -- not just money you borrowed from grandma.
Qualified interest is defined a little more broadly than just the amounts you see in your payment history, so it's important to get the correct totals from the loan holder. They'll send you the amount automatically if you paid at least $600 in interest over the tax year -- less than that and you'll have to give them a call.
In most cases, the loan borrower receives the deduction, regardless of who actually made the interest payment.
[Learn about these three potential student loan changes.]
3. Lifetime Learning Credit: This is similar to the American Opportunity Credit; the difference is that there is no limit to how many years this credit can be claimed and the limit for the credit amount is slightly lower at $2,000. You cannot claim both the Lifetime Learning Credit and the American Opportunity Credit in the same tax year.
In 2013 the income limits for this credit increased from $52,000 to $62,000 for single filers and from $104,000 to $127,000 for joint filers. Those making more than $53,000 but less than $62,000 will see a gradual reduction in their allowable credit.
[Find out how grandparents can qualify for education tax credits.]
4. Tuition and fees deduction: If you tend not to owe a lot of tax to begin with, a tax credit may not do you as much good as a deduction might.
The tuition and fees deduction allows you to deduct up to $4,000 in qualified education expenses that you paid during the tax year for yourself, your spouse or a dependent you are claiming as an exemption. Like most of these higher education benefits, there's no double dipping so you'll need to figure out which is the most beneficial to you -- the Lifetime Learning Credit, American Opportunity Credit or this tuition and fees deduction.
The income caps on this one are $80,000 for singles, $160,000 for joint filers. Speaking of joint filers, you can't take this deduction at all if you are married but choose to file separately.
It's important to do your homework on these credits and deductions as there are quite a few details that can make all the difference in your eligibility. While ultimately you should always consult a tax professional, Publication 970 at the IRS website can also give you all the details and then some.
There's other great information in there as well, such as the tax benefits of using savings bonds to pay for higher education expenses and when to claim your mileage for work-related education. It may be more complicated than sitting by the fire, but it's more likely to positively affect your bank account.
Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.