An array of federal tax breaks awaits you if you qualify for them based on your family income. They include the American Opportunity Tax Credit (AOTC), the lifetime learning credit (LLC), and several types of tax deductions.
The AOTC is the most lucrative—worth a maximum of $2,500 off your tax bill for the year as long as you paid at least $4,000 in tuition. It’s open to married couples earning less than $180,000 a year (or singles earning less than $90,000).
Since you can use only one of the college tax credits at a time, you’ll want to take the AOTC first.
One snag: You can’t pay the $4,000 using any tax-advantaged money, such as your 529 college savings plan. So to maximize your AOTC, plan to pay the first $4,000 of tuition each fall out of current income, a loan, or from other savings.
You can claim the AOTC for only four years per child. But you may be able to squeeze up to $2,000 more out of Uncle Sam if you earn no more than $130,000 (or for single parents, $65,000). To do that, plan to pay some tuition after Jan. 1 of your child’s senior year. That will entitle you to claim the lifetime learning credit in year five, which reduces your tax bill by 20% of your tuition costs, up to $10,000 in tuition.
If you aren’t eligible for the LLC, you might be able to take the tuition and fees deduction, which can be worth $1,000 or so, depending on your tax bracket. You may also qualify for a student loan interest deduction if you borrowed money for college.
More information on these and other education-related tax breaks is available in IRS Publication 970.