College is expensive, so maximizing your tax breaks can help reduce the pain a bit. Income limits apply to all of the education-related tax breaks, but they can change with inflation. Tuition qualifies for a number of tax breaks, but you can only include your room and board costs indirectly through the student loan interest deduction.
American Opportunity Credit
The American opportunity credit offers a credit of up to $2,500, 40 percent of which is refundable. When figuring the credit, you can use the cost of tuition, books and supplies, but not your room and board. In addition, you must be enrolled at least half-time, and you cannot have completed your first four years of post-secondary education when you claim the credit. The credit equals 100 percent of your first $2,000 of qualifying expenses and 25 percent of your next $2,000 of expenses. For example, if you have $3,000 of qualifying expenses, your credit equals $2,250.
Lifetime Learning Credit
The lifetime learning credit also offers a tax credit, but you can only include your tuition and mandatory fees. Books, supplies and room and board costs do not qualify. However, the lifetime learning credit is more expansive because you can use it any number of years and for any post-secondary expenses, including graduate school. The amount of the credit equals 20 percent of your first $10,000 of expenses, for a maximum credit of $2,000.
Tuition and Fees Deduction
The tuition and fees deduction allows you to deduct up to $4,000 in qualified expenses. Like the lifetime learning credit, you can only include costs of tuition, but not room and board. In addition, you can claim any post-secondary tuition costs, including graduate school, instead of being limited to undergraduate work, as with the American opportunity credit. Generally, you should only claim the tuition and fees deduction if you don't qualify for the American opportunity credit or the lifetime learning credit, because you can only claim one of the three each year.
Student Loan Interest Deduction
Just when you started worrying you'd never catch a tax break for your room and board, you might be able to take advantage of the interest on your student loans. You can deduct the interest you pay on loans used for post-secondary educational costs, up to $2,500 per year. Unlike the other tax breaks, qualifying expenses includes not only tuition and fees, but also room and board. For example, if you had a scholarship that covered all of your tuition but you had to take out a loan to cover room and board, the interest you pay on that loan is still tax-deductible.
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