Remember Tax Tips When Paying College Expenses

AMES, Iowa -- Most students have arrived on campus, unpacked their belongings, shopped for books and supplies, and attended their first classes for the fall semester. Soon payments will be due on university bills. Mary Beth Kaufman, a family finance program specialist with Iowa State University Extension and Outreach, reminds students and parents paying college expenses to keep receipts and be aware of tax benefits that can help offset college costs.

Mary Beth Kaufman“The Internal Revenue Service identifies these tax benefits that may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return,” Kaufman said.

The American Opportunity Credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education.

“Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes,” Kaufman said. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).

“In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions,” Kaufman said. There is no limit on the number of years someone can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, the tax filer’s modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).

The Tuition and Fees Deduction can reduce the amount of income subject to tax by up to $4,000 for 2011 even for those who do not itemize deductions, Kaufman continued. “Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000, or below $160,000 if married filing jointly.”

Generally, personal interest paid, other than certain mortgage interest, is not deductible. However, someone whose modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return) may be able to deduct interest paid on a student loan used for higher education during the year. This can reduce the amount of income subject to tax by up to $2,500, even for someone who doesn’t itemize deductions.

“Remember that for each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son,” Kaufman explained.

“You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which offers you a greater benefit,” Kaufman said.

For more information, visit the Tax Benefits for Education Information Center at or check out Publication 970, Tax Benefits for Education, which can be downloaded at or ordered by calling 800-TAX-FORM (800-829-3676). 

“As tax season approaches, watch for free tax services offered by a Volunteer Income Tax Assistance (VITA) Program in your area,” Kaufman added.