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Take Advantage of These Back-to-School Tax Benefits

Julie A. Forest
Tax Manager

Take Advantage of These Back-to-School Tax Benefits

It’s hard to believe that it’s already August and time to get ready to head back to school. While you’ve probably seen the massive displays and bins overflowing with notebooks and pens at retail stores, it probably escaped your mind what you need to do to financially prepare for school. There are 16 states that offer tax-free shopping weekends throughout the year; unfortunately California is not one of them. The good news is, there are several other ways college students (and their parents) can save money that doesn’t involve eating ramen 7 days a week.


  1. AMERICAN OPPORTUNITY TAX CREDIT (AOTC). This is a tax credit of up to $2,500 of the cost of tuition, required fees, and course materials paid during the tax year. The credit is 40% refundable ($1,000) which means you can get a refund back even if you don’t owe any tax. To be eligible, you must be enrolled in school at least half-time at a qualified institution. The credit is available only for the first four years of post-secondary education. The credit starts to phase out for modified adjusted gross incomes over $80,000 for an individual or $160,000 for joint filers.
  2. LIFETIME LEARNING CREDIT (LLC). The Lifetime Learning Credit is a tax credit for any person who takes college courses. It provides up to a maximum of $2,000 in tax credits on the first $10,000 of college tuition expenses. Unlike the AOTC, you don’t have to be in the first four years of undergraduate school and the credit can be used to help offset graduate school or advanced degrees (or expenses for students that take over four years to graduate!) The LLC is NOT refundable, which means you must have a tax liability to claim the credit. The Lifetime Learning Credit also has lower income phase outs and you can only claim the credit if you earn less than $65,000 individually or $130,000 if you are married and filing jointly.

While you may be eligible for both the American Opportunity Tax Credit and the Lifetime Learning Credit, you may only claim one of the credits in each tax year. Parents can claim the credit as long as the student is claimed as a dependent on their tax return. If the student is no longer a dependent, they can claim the credit on their own tax return. To claim an education credit, consult with your tax preparer.


  1. STUDENT LOAN INTEREST DEDUCTION. Student loans are a financial burden for many. On the positive side, you can deduct up to $2,500 a year from your student loan interest as long as it is from a qualified lender such as the government or a private bank. Unfortunately, loans from family members do not qualify.
  2. TUITION AND FEES DEDUCTION. Unfortunately this popular deduction expired at the end of 2016 and it is impossible to tell whether Congress will revive it or not. The deduction was taken as a maximum $4,000 above-the line adjustment to income. It was available for taxpayers whether or not they itemized deductions on their 1040 (Schedule A). The deduction could only be claimed if the education credits were not.

So what’s the difference between a credit and a deduction? A tax credit is a dollar-for dollar reduction of the tax you have to pay ($1,000 tax credit reduces your taxes owed by $1,000.) A tax deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.


  1. 529 COLLEGE SAVINGS PLAN. With the ever increasing cost of tuition it is never too early to start saving for your children’s education! 529 plans can help students and their families save for college, graduate, or vocational school tuition in a tax advantaged way. There are no federal deductions available for contributions to the plan, but any earnings are tax deferred while in the plan and remain tax free if used to pay for qualified educational expenses.

There are additional stipulations and some college expenses that are typically excluded from any tax benefits such as room and board, transportation, insurance, etc. so we recommend that you speak to your CPA before making any financial decisions. Preparing for college and managing your taxes is stressful, but we’re here to help! Please feel free to contact us with any tax related questions or visit the IRS website for more information.


PKC Kuebler, APC is a full-service public accounting firm registered and licensed to practice as an accountancy corporation by the California Board of Accountancy. The information provided is intended for general tax and accounting needs. Articles are written for informational purposes only and should not be seen as any kind of advice. Content is accurate and true to the best of our knowledge, however, there may be omissions, errors or mistakes and it is advised you contact your CPA before taking any financial action. The opinions expressed in our articles do not reflect the opinions of any organizations in which we are affiliated with.

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