- Age-Appropriate Strategies
- The Cost
- Developing a Funding Strategy
- Investment Vehicles
- Saving Taxes
- Other Ways to Meet College Costs
- Parental Loans for Learning
- Landing Financial Aid
- Education Tax Incentives
- Federal Loans and Grants
- Worksheet: Inflation
- Worksheet: Putting It All Together
The American Opportunity Tax Credit (AOTC) allows taxpayers to save money on their taxes if they paid higher education expenses for themselves, a spouse, or a dependent. The credit is worth up to $2,500 per student but only for their first four years of higher education. If you paid education expenses for multiple people, such as for two dependents, you can deduct up to $2,500 for each person. Your exact credit amount is calculated as the 100% of your first $2,000 of qualified expenses, and then 25% of your next $2,000 of eligible expenses. You need to have at least $4,000 of expenses per person in order to qualify for the maximum credit.
Qualifying expenses include tuition, fees you are required to pay in order to enroll in a course or program, books and classroom supplies and equipment.
Only a student’s first four years of higher education are eligible for the AOTC. This is typically just enough for an undergraduate degree and so graduate students don’t qualify unless their undergraduate degree took fewer than four years to complete. You don’t need to complete all four years consecutively, but a taxpayer can only claim the credit on four separate income tax returns. (The four-year limit includes any years you claimed the Hope credit, a previous version of the AOTC)
2020 AOTC Income rates
|FILING STATUS||MAXIMUM INCOME FOR FULL CREDIT||MAXIMUM INCOME FOR PARTIAL CREDIT|
|Head of household||$80,000||$90,000|
|Married, filing jointly||$160,000||$180,000|
|Married, filing separately||$80,000||$90,000|
Board: Cost of dining hall meals. Most schools have several plans with varying costs.
Campus-based programs: The federal student aid programs administered by a school's financial aid office—the Perkins loan, Supplemental Educational Opportunity Grant, and the Work-Study program.
Cooperative education: A program offered at many schools combining periods of study with periods of paid employment, generally related to the student's major.
Expected family contribution: The dollar amount the family is expected to contribute for the year toward the student's cost of college attendance.
Federal Pell Grants: This is a federal program that is based on a student's financial need. The amount a student receives depends on the student's financial need, the cost of the college, length of the program, and if enrollment is full- or part-time. There is no repayment on a grant.
Federal Supplemental Educational Opportunity Grant Program (FSEOG): This is a campus-based program, which means that even though the money for the grant comes from the federal government, individual colleges and universities distribute money to students who demonstrate the most financial need. Once again, there is no repayment on a grant.
Federal Work-Study Program: A federal campus-based program. Colleges who participate in this program provide employment opportunities for students who are in need of financial assistance. Students are generally employed on campus and work part-time. The money that students earn at these jobs is used to cover college expenses. Some examples of these positions are library assistant, office secretary, faculty aide, dining hall worker, and groundskeeper.
Financial aid: Refers to programs funded by federal and state governments and by individual schools to help students with their educational costs. They consist of grants and scholarships, which do not have to be paid back, student loans, which do have to be paid back, and work-study jobs.
Free Application for Federal Student Aid (FAFSA): This application is available through your high school guidance office or a college financial aid office, or by calling 1-800-4-FED-AID (1-800-433-3243), or online at www.fafsa.ed.gov.
Funding Education Beyond High School: The Guide to Federal Student Aid: This free pamphlet is published by the U.S. Department of Education and can assist you in figuring out the financial aid process. You can obtain your free guide by calling 1-800-433-3243, or online at www.studentaid.ed.gov.
Lifetime Learning Credit: The lifetime learning credit, or LLC, is a tax break for taxpayers with education expenses during the year. This mostly covers tuition but includes other fees and costs you have to pay in order to enroll in a class or program, as long as you pay those costs directly to the school or program administrator.
Unlike other education tax credits, the LLC covers the cost of classes that help you to improve your job skills or learn new job skills. You do not need to be in a degree program to claim the LLC. However, most accredited postsecondary institutions do qualify. The lifetime learning credit also covers your expenses for career development classes and other classes to learn or improve your job skills.
The lifetime learning credit is worth a maximum of $2,000 per tax return but you need to have at least $10,000 of expenses to be eligible for the full deduction ($20,000 if you file a joint tax return). You also need to fall within the income limits to claim this credit. For 2020, your income must be $69,000 or less ($138,000 for joint filers) to claim even a partial credit, up from $68,000 ($136,000 for joint filers) in 2019.
Qualifying expenses include tuition and fees you are required to pay in order to enroll in a course or program.
Your exact credit is calculated as 20% of your first $10,000 of qualified education expenses, which means you need to spend at least $10,000 ($20,000 for joint filers) on eligible expenses in order to get the full LLC.
Room: Housing in school dormitories that you pay directly to the school; other housing choices (apartments, fraternities and sororities) are not generally billed through the institution.
Subsidized Stafford Loan Program: This program allows students who are in financial need to borrow money from banks, credit unions, savings and loan associations, and educational organizations. Repayment on this loan is deferred until six months after a student graduates or leaves school.
The College Board: Students should contact the College Board at 212-713-8000 or online at www.collegeboard.com for information on planning for college, finding the right college, and a host of other services.
Tuition: The charge for instruction that is used to pay salaries and to meet the operating costs of the institution.
Uniform Gift to Minors Account (UGMA) and Uniform Transfer to Minors Account (UTMA): A special account set up to transfer property to a minor child.
Unsubsidized Stafford Loan Program: This program is available for students who do not qualify for subsidized Stafford loans. The terms and interest rates are the same as the subsidized Stafford Loan. Repayment should begin when the loan is issued but can be deferred until 6 months after the student leaves school. However, interest begins to accrue as soon as the loan is issued.
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