January 10, 2021 - Douglas Myser

Can you deduct college tuition on taxes. We are asked this question quite often by those seeking tax resolution, looking for ways to reduce tax debt. There are several ways to deduct college tuition and textbooks on your federal income tax return, with the American Opportunity Tax Credit, Lifetime Learning Tax Credit, Tuition and Fees Deduction, and Employer-Paid Educational Assistance, and tax-free distributions from college savings plans. Each dollar of qualified expenses can be used only to justify one tuition tax break. You cannot use more than one of these plans. There are also restrictions that prevent a taxpayer from claiming the American Opportunity Tax Credit at the same time as the Lifetime Learning Tax Credit, for the same student, even if the qualified expenses don't overlap. The American Opportunity Tax Credit is the best of the tuition tax breaks. Its is worth more per dollar of qualified expenses than any other tuition tax break, even a tax-free distribution from a 529 college savings plan. Taxpayers should claim the American Opportunity Tax Credit first, unless they want to preserve its availability for future tuition expenses. It has the most potential to save a taxpayer the most dollars. Can you deduct college tuition on taxes.

All of these tax breaks can be claimed even if the taxpayer does not itemize. The American Opportunity Tax Credit is a partially refundable tax credit worth up to $2500 per student per year. The AOTC covers 100% of the first $2500 in tuition, fees and course materials (textbooks, supplies and equipment) per student and 25% of the second $2000. The tax credit is 40% refundable (up to $1000) if the taxpayer cannot be claimed as a dependent on someone else's income tax return. Qualified expenses do not include nonacademic fees, such as student activity fees, athletic fees and insurance.  The tax credit is limited to the four years of post secondary education and to four tax years per student. Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid in the current tax year.