The MainStreet Guide to College & Taxes


NEW YORK (MainStreet) – In recent weeks a new class of freshmen has lined up to register at America’s colleges and universities, with tuition bills coming due as a result.

Each year the cost of a college education gets more expensive. When I was an undergraduate I paid only $40 per credit, with more prestigious schools like New York University charging $100 per credit. But that was 40 years ago.

Today the College Board estimates that the average annual cost of tuition and books for a full-time student enrolled in a four-year undergraduate degree program, after taking into consideration grants and financial aid, is $7,605 for in-state students and $11,990 for out-of-state students at a public college and $27,293 for a private nonprofit institution. The average cost of a public graduate school is about $39,000.

And that does not include room and board.

The current U.S. tax code provides several ways to help American students pay for a “post-secondary” education.  Let’s take a look at the “education menu” of tax breaks.

(The following slides represent only an introduction to each item. Note that each has its own set of unique rules and regulations, especially when combining them on your tax return. For more information you should consult your tax professional.)

American Opportunity Credit

This benefit provides a maximum credit of $2,500 per student -- 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. To get the maximum credit you must spend at least $4,000 on tuition or educational expenses. The student must be pursuing an undergraduate degree or other recognized education credential.

The credit is available for the first four years of post-secondary education. Qualified expenses include tuition, fees, and required “course materials” such as books and supplies.

The credit is phased out for single taxpayers with “modified” Adjusted Gross Income (MAGI) of between $80,000 and $90,000 and joint filers with MAGI of $160,000 to $180,000. No credit is allowed for married couples who file separately. These amounts are not indexed for inflation.  “Modified” AGI begins with regular AGI and adds back any exclusion or deduction for foreign income, foreign housing costs, income for residents of certain U.S. possessions, and income from Puerto Rico.

Up to 40% of the total credit, to a maximum of $1,000, may be refundable. A taxpayer can get back more money then he paid in!

Generally you cannot claim this credit if you are a dependent. But if the MAGI of a dependent student’s parents exceeds the phase-out, the parents can elect not to claim the student as a dependent. The student cannot claim himself, but can claim a credit of up to the amount of his income tax liability. None of the credit is refundable.