Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
- The American Opportunity credit – up to $2500 per year per student for qualifying expenses for the first four years of postsecondary education.
- The Lifetime Learning credit – up to $2000 per tax return for postsecondary education expenses even beyond the first four years.
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit it will likely provide the most tax savings. If you’re not the Lifetime Learning credit isn’t necessarily the best alternative.
Despite the dollar-for-dollar tax savings credits offer you might be better off deducting up to $4000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction it reduces your adjusted gross income which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.
How Much Can Your Family Save?
Keep in mind that if you don’t qualify for breaks for your child’s higher education expenses because your income is too high your child might. Many additional rules and limits apply to the credits and deduction however. To learn which breaks your family might be eligible for on your 2015 tax returns – and which will provide the greatest tax savings – please contact us.