Key Question For Millennial Job-Switchers: What To Do With Your Old 401(k)?
There’s no better way to pay for next year’s tuition than using this year’s tax credit and deductions. How much can you get back form your taxes to pay for next year’s tuition? Let’s add it up.
First, the American Opportunity credit is the most lucrative tax credit. You can get back up to $2,500 back. You’ll get back up to $1,000 even if you didn’t pay taxes. And that’s per student. So a family who qualifies income wise and has two family members attending college could get back up to $5,000. This credit is good for the first four years of college education.
How do you know if you qualify income wise?
According to Internal Revenue Service
“To claim the full credit, your MAGI, modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly).
- You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
- You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
♦MAGI for most people is the amount of AGI, adjusted gross income, shown on your tax return. On Form 1040A, AGI is on line 22 and is the same as MAGI.”
How does the phase out work? Let’s say you’re filing as a single filer and your MAGI is $70,000. Since your income is halfway between $60,000 and $80,000, you’d get up to half the tax credit: $1,250.
The American Opportunity Credit is good for the first four years of college education. But what if the student is past the first few years of college? Then it’s time to take a look at the Lifetime Learning Credit.
The Lifetime Learning Credit applies for all future years at an eligible institution. But there are key differences such as income limits.
According to the Internal Revenue Service,
“To claim the full credit, your MAGI◊, modified adjusted gross income must be $52,000 or less ($104,000 or less for married filing jointly).
- If your MAGI is over $52,000 but less than $62,000 (over $104,000 but less than $124,000 for married filing jointly), you receive a reduced amount of the credit.
- If your MAGI is over $62,000 ($124,000 for joint filers), you cannot claim the credit.”
In this case, the phase for a single filer is a $10,000 range. Someone making a MAGI of $57,000 would qualify for up to a $2,000 credit. However, the credit comes from 20 percent of up to $10,000. Thus, if tuition and other qualified education expenses were $5,000, the maximum credit would be $1,000. If the filer didn’t pay taxes, the amount wouldn’t be refundable.
Finally, the student loan interest deduction can add another $625, depending on income qualifications if you were also paying down student loans in the same year. State income tax education credits and deductions can help, too. For instance, a state education tax credit of $200, still adds up.
So in total for a family supporting an undergraduate student early in their education, they could easily score $2,500 or more for their child’s education for next year. A grad student could also snag over $2,000. Just make sure to put this money aside for next year’s college bills when refund checks come in.
Reyna’s a financial journalist who’s authored two editions of “CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life” and writes iGrad’s advice column Ask Reyna.
