College is expensive. It makes sense to take advantage of any tax breaks you can find to ease some of the financial burden. According to the National Center for Educational Statistics, costs at public institutions rose 42 percent between 2000 and 2010. The average cost for undergraduate tuition, room and board for the 2010-11 school year at public institutions was $13,600. While you may not be able to deduct what you spend on your kid's dorm, you may still get a break.
Tuition and Fees Deduction
The tuition and fees deduction can reduce your taxable income by $4,000. However, as the name suggests, only tuition and required fees from an eligible school qualify for this deduction. Personal living expenses -- such as room and board or a dorm room -- do not qualify. If you have the option, you may want to pay for your kid's tuition and fees out-of-pocket and cover the dorm room using scholarships, so you can deduct your expense.
If you have a 529 college savings plan for your child, you can pay for her room and board from this account. While the contributions are not tax deductible, your qualified distributions are. This means your money grows tax-free. Money in the 529 account is counted as the parent's assets, meaning your child could qualify for more financial aid than if the money came from her personal savings account. A 529 plan can be set up at any age, so setting one up could be worth a look.
If your child isn't set on living on campus -- and the school does not require it -- you might be able to find some tax savings by purchasing a house for your child to live in. You may be able to deduct the interest or other housing costs on your taxes, while building some equity. College towns can be great places to invest as the housing market may be less volatile and renters are plentiful.
While you can't deduct the dorm room itself, there may be some things in the dorm room that qualify for a tax deduction or credit. Computer equipment, books and supplies required by the school could earn you tax savings. Check out the American Opportunity Credit and the Lifetime Learning Credit. The American Opportunity Credit is worth up to $2,500, and it covers eligible tuition, fees and course materials. The Lifetime Learning Credit is worth up to $2,000 and covers eligible tuition, fees and other costs required by the school.
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