College is expensive but tax credits can help

Schools are starting across the country and this weeks marks the start of the 2018 Fall semester at the University of Texas at Austin. Since I live close by and went to UT, it’s an important piece of information for me. In a couple of weeks I’ll be heading to campus for on campus interviews with their accounting students. I always enjoy going back to the McCombs School of Business and seeing all the students going about their daily lives.

Picture of the University of Texas tower
Picture of the University of Texas tower

If you’re a student going off to school, you’ve hopefully secured your housing arrangements, registered for classes and purchased your books and supplies. One question you might be having is whether any of these expenses are deductible. Here’s the skinny on these expenses and how they affect yours (or your parents) taxes.

The tuition and fees deduction expired at the end of 2017, so as of today, you can’t take this deduction on your 2018 tax return. However, it is always possible that Congress revives this deduction retroactively so don’t write it off just yet.

If you can’t deduct them, is there any other way to get a benefit from them. Well, you have two education tax credits available that might help you out. The first is the American Opportunity Tax Credit (AOTC) and the second is the Lifetime Learning Credit (LLC).

Here’s a brief summary of the two credits:

American Opportunity Tax Credit (AOTC): 

This is a refundable tax credit that allows taxpayers to reduce income taxes by up to $2,500 for each eligible student. Learn more on the IRS website here.

Lifetime Learning Credit (LLC):

This tax credit is not refundable but it does provide a tax credit of up to $2,000 per taxpayer for education expenses. The credit is equal to 20% of the first $10,000 of qualified tuition and related expenses. Learn more on the IRS website here.

OK, so now back to your expenses because I know they’re piling up quickly. Unfortunately, the IRS doesn’t let you include all your expenses, however, most full time students have plenty of eligible expenses to claim the full amount of the credits. The IRS lets you include your Qualified Education Expenses for the education credits.

Tuition & Fees – these expenses are eligible to be included in the calculation of both the American Opportunity Tax Credit and the Lifetime Learning Credit.

Books, Supplies & Equipment – these expenses that are required for your course of study are included in the American Opportunity Tax Credit but are not included in the Lifetime Learning Credit.

Expenses that do not qualify – these expenses don’t qualify for either the American Opportunity Tax Credit or the Lifetime Learning Credit:

  • Room & Board
  • Insurance
  • Medical expenses (including student health fees)
  • Transportation
  • Personal, living or family expenses
  • Sports, games, hobbies or non-credit courses

Now that you know which expenses are eligible for the education tax credits, it’s important to keep track of your expenses and save your receipts for qualified expenses. The school will send you a Form 1098-T that reports your tuition amounts but you should keep your related receipts and confirm that the amount includes all your eligible expenses. As for your books, supplies and related equipment, keep your receipts from all your purchases because you won’t receive a year-end report for these amounts. You’ll want to use these for calculating your total expenses for the American Opportunity Tax Credit.

If you have any questions on these credits or how to claim these credits, please use the contact me page to ask any questions.