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Education Tax Benefits: Can They Help You Pay for College?

Young, woman college student reviewing education tax credits at school.

Many people know if they pay tuition, they may qualify for tax benefits when they file their tax returns the following year. Getting a bigger tax refund in April is never a bad thing. But what if you need the money now to help you get back to school?

If you plan it right, education tax perks can help you defray the cost of tuition and other educational expenses sooner rather than later.

Follow these steps to let the Internal Revenue Service (IRS) help you or your kids pay for college this fall.

Step 1: Determine which education tax benefits you qualify for.

The most advantageous benefits, if you qualify, are generally the education credits. There are two education credits – the American Opportunity Tax Credit and the Lifetime Learning Credit.

American Opportunity Tax Credit (AOTC). First and foremost, take advantage of the AOTC if you can. This credit, formerly known as the Hope Credit, applies to your first four years of college. It gives you back 100 percent of your first $2,000 in tuition and other expenses as a credit. Plus you get 25 percent of the next $2,000. That’s $2,500 altogether. The AOTC is usable for four years of undergraduate studies.

Look at it this way. If you pay $1,000 for tuition at a community college, and you qualify for the AOTC, you may save $1,000 in income tax. That makes your tuition in effect 100 percent paid for by tax savings.

The student can be you, your spouse or your dependent. But, that person must be enrolled at least half-time in a program leading to a degree to take this credit. The credit phases out at higher income levels.

Lifetime Learning Credit. The next best tax benefit is the Lifetime Learning Credit. With this credit, you could qualify for 20 percent of up to $10,000 in education expenses. That means a tax credit of up to $2,000. This credit also phases out at higher income levels.

Higher education expenses deduction. If you don’t qualify for an education credit, you typically can deduct up to $4,000 of your expenses from your taxable income. This deduction is available even if you don’t itemize.

But, there are two caveats to keep in mind. This deduction is not available if you are married filing separately. It’s also not an option if another person claims you as a dependent.

**It’s important to note this deduction expired at the end of 2016 and is pending Congress approval for 2017. Generally the deduction is reinstated, but double check later this fall when the latest tax laws are announced. TaxAct will update their product and information accordingly.**

Other education tax benefits. Some taxpayers qualify for other tax benefits, such as employer-paid tuition or prepaid tuition plans.

Step 2: Adjust your income tax withholding or estimated tax payments to account for education benefits.

Once you know which tax benefit you can take, take advantage of the it right away by reducing your income tax withholding or by paying less in quarterly estimated taxes. That puts your money in your checking account now – when you need it.

If you want to adjust your Form W-4 to have less income tax withheld, I recommend going through the Form W-4 Withholding section in the TaxAct products. Simply answer the questions, making sure to answer questions about education expenses, and TaxAct prepares Form W-4 for you to print. Then, take the new Form W-4 to your payroll department at work.

For a quick way to see how adjusting your allowances on Form W-4 affects your income tax withholding, try TaxAct’s Paycheck Plus Calculator.

If you make quarterly estimated tax payments, you can easily calculate your expected tax liability after deducting education tax benefits within the TaxAct product. Following this step helps to determine the right amount to pay in quarterly taxes.

By paying less in income tax now, you can take advantage of education tax perks immediately. That puts your money in your checking account much sooner to help pay for school this fall.

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.