If you are a current college student or recent graduate, you should claim any amount over $600 paid on the interest of your student loans. This helps to balance your budget into next year so you can pay your loans down further.
Looking into additional tax credits or deductions can help you continue to pay down your student loans. If you are a parent and have at least one dependent child attending a college, university, or trade school, you can file for a tax credit to help you manage the financial support of your child.
As of 2019, there are two college tax credits offered by the Internal Revenue Service (IRS) that you can qualify for. This change stems from the Tax Cuts and Jobs Act (TCJA) of 2017 and the Bipartisan Budget Act of 2018. The latter extended the tuition and fees deductions in both college tax credits.
Current law states that you cannot claim both tax credits when you file your taxes, but if you qualify for one college tax credit, you can continue to claim your student loan deduction too. This involves Form 8863, which helps you calculate eligible school expenses.
The Two College Tax Credits Available to Students or Their Parents
Due to the recent changes in tax law, there are two college tax credits you can claim as a current college student or recent graduate paying down student loans.
American Opportunity Tax Credit (AOTC)
This was formerly called the Hope Scholarship Tax Credit. Changes to tax law have expanded this form of tax assistance, allowing more people to file for more money. In 2009, the well-known Hope Scholarship Tax Credit was expanded by Congress into the AOTC, providing a more general college tax credit.
The AOTC applies only during the first four years of postsecondary education payday loans Dunmore Pennsylvania at a college or university. Graduate school, certificate programs, and professional school do not count for the AOTC. Students must be currently enrolled and cannot have graduated in the previous tax year.
Eligible students can claim up to $2,500 per year they are in school (up to four years). For example, if you are a parent to three qualifying dependent undergraduate students, you can claim up to $7,500 as a college tax credit to ease your financial burden.
- You can claim up to 100% of the first $2,000 spent on your education that year.
- You can claim up to 25% of the second $2,000 spent on your education that year.
While this amounts to as much as $2,500 in claimable tax credits, only $4,000 of your education spending is considered a tax write off. The first $2,000 is a general tax credit, while only a quarter of the second $2,000 counts as a college tax credit.
- Tuition and fees
- Books and supplies
- Equipment (e.g., computer)
- Required course materials
The money you spend on room and board, transportation, and other indirectly related educational expenses does not count for the AOTC. However, 40% of the AOTC is refundable, so if you don’t owe anything in a given tax year, you could receive up to $1,000 as a tax refund when you meet filing requirements. You must be an enrolled student at a college, university, or professional school at least half time, depending on how the school measures enrollment hours.
- If you are a single adult and not a dependent, you must make $80,000 or less per year to use the AOTC college tax credit. The credit completely phases out at $90,000 or more per year.
