For the 2021 tax year, there are two significant tax breaks for college students (or parents who are paying their tuition). These credits are designed to offset your tax payment directly rather than reducing the percentage of your income that is taxable.
Please note that you may only claim either the Lifetime Learning Credit or the American Opportunity Credit per tax year. Households cannot claim both credits, even if they have multiple students enrolled in college.
The Lifetime Learning Credit
This credit applies to qualifying higher education costs up to $10,000. The Lifetime Learning Credit refunds 20%, or up to $2,000 per return. Nearly all degree courses and non-degree courses are eligible, irrespective of the year of study.
There is a limit of one Lifetime Learning credit per tax year, so households that have more than one student enrolled should be strategic about which tuition costs they choose to claim for this credit.
The income limits are:
- $180,000 for married tuition payers or guardians of dependents filing a joint return
- $90,000 for single tuition payers or guardians of dependents
The American Opportunity Credit
This tax credit offsets $2,000 of qualifying college expenses entirely, while the next $2,000 is offset by $25. Qualifying expenses include tuition, books and other course materials, and associated fees. Housing, transportation, elective fees, insurance costs, and medical care are not eligible.
Each eligible student can receive up to $2,500 maximum. There is no limit on the number of students per family who can receive this credit. This means that a family who has four individuals attending college can receive a credit of $10,000.
For the 2021 tax year, college students are eligible for the American Opportunity Tax Credit if:
- The student is enrolled in their first four years of college
- Tuition payers or guardians of dependents who are married filing a joint return cannot earn more than $160,000
- Single tuition payers or guardians of dependents cannot earn more than $80,000
If your federal income tax bill is fully eliminated through credits and deductions, you should know that up to 40% of the American Opportunity Tax Credit can be refunded. You may still collect some percentage of remaining credit. We will evaluate your situation, then advise you if this special circumstance applies.
Is your income too high?
If you are the guardian of a college student who earns a separate taxable income, you may choose not to claim your student as a dependent. The student may claim one of these credits on their own in order to maximize the family’s overall tax refund.
To claim one of these credits, you will need Form 1098-T and 8863.
For assistance with these tax breaks for college students and parents, or to learn more about tax-free college savings withdrawals, tax-free savings bond interest, and this year’s guidelines about student loan interest deductions, please reach out to us directly.