Whether you had a child in college or graduate school last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.

A couple of tax credits also are available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that is taxed.

Higher education breaks 101

While multiple higher-education breaks are available, a taxpayer is not allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So, first you need to see which breaks you are eligible for. Then, you need to determine which one will provide the greatest benefit.

Also keep in mind that you generally cannot claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.

Credits

Two credits are available for higher education expenses:

1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phaseouts apply to these credits.

If you are eligible for the American Opportunity credit, it will likely provide the most tax savings. If you are not, consider claiming the Lifetime Learning credit, but first determine if the tuition and fees deduction might provide more tax savings.

Deductions

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Since it is an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. However, income-based limits also apply to the tuition and fees deduction.

Be aware that the tuition and fees deduction was extended only through December 31, 2017, so it will not be available on your 2018 return unless Congress extends it again or makes it permanent.

Maximizing your savings

If you do not qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2017 tax returns — and which will provide the greatest tax savings — please contact us.