By Damian Davila ..
Dear students, I’m sure that you have heard the news: Every single year the average student loan debt per borrower is increasing. For example, the average class of 2015 graduate with student loan debt will owe a little more than $35,000.
Still, there is a silver lining: College students and grads often qualify for significant tax breaks and deductions. To minimize your tax bill and increase your chances of a refund, here are eight tax deductions and breaks worth knowing about.
1. 529 Plans
If your parents or other donor started a 529 plan for you, you’re in luck. Also known as qualified tuition programs, 529 plans allow individuals to save for education expenses on a tax-deferred basis and allow a designated beneficiary (ideally, that’s you) to use those funds, including interest gains, for qualified expenses free of taxes or penalties.
But few people know that you can also start a 529 plan for yourself. Yes, if you anticipate returning to school for any reason, you can save for related expenses in your own 529 plan – at any age. The list of qualified education expenses goes beyond tuition and academic fees, including expenses for room and board, transportation, equipment, and accommodations for individuals with special needs, so adults can benefit, too. (See also: The 9 Best State 529 College Savings Plans)
2. Qualified IRA Distributions
Qualified distributions taken from a traditional IRA for use in qualified higher education expenses create no tax burden or penalty for you, assuming you only withdraw contributions, and not any earnings on the contributions. (Note: If your spouse, parent, or grandparent takes distributions from their own plans to fund your educational expenses, they would have to pay applicable income taxes on those funds, but don’t have to pay the early distribution penalty which applies if under age 59 1/2.)
3. American Opportunity Credit
Replacing the Hope Scholarship credit, the American Opportunity Credit allows you to cover up to $2,500 of undergraduate college costs, including:
- 100% of your first $2,000 qualified education expenses; and
- 25% of next $2,000 qualified education expenses.
Keep in mind that you can claim the American Opportunity tax credit on your own academic expenses or on those of your spouse and kids. This means that you can claim up to $2,500 per student living in your household. However, to be eligible for the full credit, your modified adjusted gross income must be $80,000 or less (those making more receive a reduced amount of the credit).
Another advantage of this tax credit is that 40% of it is refundable, meaning that the IRS will issue a refund for that amount even if you don’t owe any federal income tax.
4. Lifetime Learning Credit
The Lifetime Learning Credit allows you to deduct up to 20% of your first $10,000 in qualified education expenses, up to $2,000 per taxpayer.
Unlike the American Opportunity Credit, the Lifetime Learning Credit isn’t refundable. You can use it …read more
Read more here: Don’t Skip These 8 Tax Breaks for Students