How Much of My College Tuition Can Be Written Off My Taxes?
Depending on why you go to school, you might be able to deduct some of what you pay in tuition and possibly everything. Most consumers cannot deduct more than a few thousand dollars in educational expenses. However, you can pay for college tuition and receive a tax break even when you reach the deduction limit.
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Tuition Tax Deduction
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If you want to claim college tuition on your taxes as a deduction, you can use the tuition tax deduction, which allows you to deduct up to $4,000 in expenses as of 2010. This deduction lowers to $2,000 for all individual taxpayers with a gross income between $65,000 and $80,000, and $130,000 to $160,000 for joint payers as of 2010, according to Intuit. The IRS usually updates these numbers each year to account for inflation.
Tax Credits
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As of 2011, there are two education tax credits: The American Opportunity and Lifetime Learning credits. The American Opportunity credit applies only to students working on their first degree and has a value of up to $2,500 -- 100 percent of the first $2,000 in qualified educational expenses -- tuition, fees, books and supplies -- and 25 percent of the next $2,000. The Lifetime Learning credit is worth 20 percent on your first $10,000 in qualified educational expenses. You can only claim the tuition tax deduction or one credit. The tax credit reduces your tax bill by the actual amount of the tax break. For example, if you have a $5,000 tax bill and a $2,500 American Opportunity credit, you only pay $2,500 in taxes. Also, 40 percent of the American Opportunity credit is refundable, so you may receive money back if you have no tax obligation. For example, if you have a $1,000 tax bill and take the full American Opportunity credit of $2,500, you would receive 40 percent of $1,500 ($2,500 - $1,000), or $600, from the IRS.
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Other Tax Breaks
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If your employer offers tuition assistance to all employees, you can exclude up to $5,250 in assistance from your income. You can also deduct an unlimited amount of expenses if you are self-employed and go to school to improve your skills as long as the classes do not qualify you for a new line of work. You can deduct unreimbursed employee business education expenses, but only those that exceed 2 percent of your gross income and only if the class improves or maintains your skills.
Tip
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Talk to a tax professional about deducting college tuition as a business expense because you must make sure the classes improve or maintain skills in your current trade only and are not a minimum qualification for your industry. You can also receive tax breaks for savings for college. For example, the federal government does not tax earnings on U.S. savings bonds if you use the proceeds to pay tuition, fees, books and supplies. At the very least, you can deduct up to $2,500 in interest if you use the proceeds for qualified higher education expenses like college tuition.
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