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Ask Jane: Can I take a tax break for college expenses?

Jane Bryant Quinn
by Jane Bryant Quinn, Dimespring Contributor  (@janebryantquinn)

If you’re paying for higher education, the government is actually here to help you. You can write off part of the cost on your tax return. You can take one of three tax breaks, but only two of them are worth your while.

You qualify for the write-offs if you’re paying tuition for yourself, your spouse or a dependent. The school can be public, private, for-profit or online, as long as it’s accredited. The tax breaks apply to the cost of tuition and fees, but not room and board.

READ: Educate yourself on college tax breaks

Here’s a guide.

For a student in a degree- or certificate-granting program, attending at least half-time: Use the American Opportunity Credit. It’s good for the first four years of college or other post-secondary education. For each eligible student, you can write off up to 100 percent of the first $2,000 in qualified expenses and 25 percent of the next $2,000. That’s $2,500 per student. Besides tuition and fees, this credit also covers the cost of course-related books and equipment.

If a third party helped you pay the bills  say, a grandparent  you still get the tax credit, as long as the student is your tax dependent.

There’s an income limit. Singles and heads of household get the full credit on adjusted incomes up to $80,000. The size of the credit goes down as income rises, and phases out at $90,000. Married couples filing jointly get the full credit on incomes up to $160,000, phasing out at $180,000.

For a graduate or fifth-year student or student not working toward a degree: Use the Lifetime Learning credit. It’s good even for people taking just one course. You can write off 20 percent of tuition and fees up to $10,000 – for a maximum credit of $2,000. (That’s $2,000 total, no matter how many students in your family are taking these kinds of courses.) The credit also covers the cost of studies undertaken to improve your job skills, at a school that doesn’t offer degrees. The income limits are the same as those for the American Opportunity credit.

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For taxpayers considering the Education Tax Deduction for tuition and fees: Don’t bother. In almost all cases, you’re better off with the American Opportunity credit and you can’t take both, says Mark Luscombe, principal federal tax analyst for CCH, a tax information firm. Here’s an example:

Using the deduction, singles can write off up to $4,000 in tuition and fees, on adjusted incomes up to $65,000, $2,000 on incomes up to $80,000 and nothing over that. Married couples get a $4,000 write-off on incomes up to $130,000, $2,000 on incomes up to $160,000, and nothing over that.

At first glance, this tax deduction looks larger than the tax credit for people with middle incomes. But don’t be fooled by the high, $4,000 dollar amount. A $2,500 American Opportunity credit reduces your tax bill by the full $2,500. A $4,000 deduction in the 15 percent bracket reduces your taxes by just $600.

Don’t forget to take your tax credit! Your school should have sent you a Form 1098-T, reporting how much you paid for qualified tuition and expenses. Use it when filling out your return.

Jane Bryant Quinn is a nationally known commentator on personal finance, with books and columns read and trusted by millions. In her long career, she has established herself as America’s most reliable voice for people trying to manage their money well. Read more of Jane's articles here