Charging qualified education expenses on the right credit card can help you double down on savings if such expenses also qualify for a tax credit. Read on to find out what expenses qualify and how to pick the right card to pay for them.
Paying college costs, for yourself or for your child, can easily get expensive. Tuition and fees are usually the biggest expenses, but textbooks or a new laptop don’t come cheap.
Charging qualified higher education expenses to a rewards credit card could save you money. It could also help with claiming those expenses as a tax break later on.
These tips can help you manage college spending and rewards as you prep for the new semester.
6 tips to help manage college spending
Education costs: What’s qualified and what’s not
If you’re paying education expenses for yourself or your child out of pocket, there are two key tax credits you may be able to claim:
- American Opportunity Tax Credit: This applies to qualified expenses paid for students in the first four years of higher education.
- Lifetime Learning Credit: This credit is available to both undergraduate, graduate and continuing education students.
What’s key is knowing which expenses count for either credit.
“Qualified educational expenses for IRS purposes depend on the whether the expense is needed for courses or as a condition of enrollment or attendance,” says Charles Corsello, co-founder of Tax Debt Help.
This table breaks down which expenses are eligible for each credit:
Qualified education expenses: What’s included
|Qualified higher education expenses||Non-qualified expenses|
|Tuition (both)||Tutoring fees|
|Fees (both)||Housing, room and board|
|Student activity fees paid at enrollment (both)||Insurance, including student health fees|
|Books, supplies and equipment purchased at the school (for the Lifetime Learning Credit only)||Transportation|
|Books, supplies and equipment purchased elsewhere (for the American Opportunity Tax Credit)||Medical or dental expenses|
|Fees paid for noncredit courses or activities that help the student acquire job skills (for the Lifetime Learning Credit only)||Childcare costs if you’re paying someone to watch your child while you return to school|
Education expense credit guidelines
Each credit has some additional guidelines to know.
“The American Opportunity Tax Credit requires that the student be enrolled at least half-time, not have any drug convictions and their income must be in a certain range,” says Corsello.
The Lifetime Learning Credit is available to students enrolled less than half-time. It’s also more flexible, in that you don’t need to be earning an undergraduate degree to qualify. Graduate students or those attending vocational schools could also be eligible.
The trade-off, says Corsello, is a smaller credit amount.
- For 2019, the Lifetime Learning Credit maxes out at $2,000 per tax return.
- The American Opportunity Credit maximum is $2,500 per eligible student annually.
If you’re paying expenses for college for yourself, there’s one other caveat to know.
“Students who are claiming education credits for qualified expenses need to be sure they are not listed as either a dependent or a spouse on someone else’s tax return,” says Logan Allec, a CPA and owner of the personal finance site Money Done Right.
You can’t claim either education credit for yourself as a dependent, or if you’re married and file separate returns.
See related: 4 reasons why college students need a credit card
Don’t use just any card for qualified education purchases
Once you’ve figured out what you can get a tax credit for, the next step is choosing the right card to charge college costs.
Mark Jackson, personal finance expert at Brad’s Deals, says if you’re charging any expenses paid directly to the school, such as tuition or fees, to check the institution’s payment policy first.
“Ensure that your particular college does not charge a fee for credit card transactions,” says Jackson. “Many colleges do, and if so, that will immediately decrease the value of cash back or miles earnings.”
The next step is deciding which type of rewards you want to earn. Travel miles or points may be more valuable to you than cash back, for example, if you travel often. On the other hand, cash back may be better if you’re planning to redeem rewards for a statement credit later.
These cards may be good options for earning cash back on back-to-college spending:
- Bank of America® Cash Rewards credit card: Earn 3 percent cash back in the category of your choice, which includes online shopping, and 2 percent cash back at wholesale clubs and grocery stores. (3 percent and 2 percent cash back on the first $2,500 in combined purchases each year, 1 percent thereafter.)
- Target Redcard: Earn 5 percent cash back automatically on Target purchases, in-store and online.
- Citi® Double Cash Card: Earn 1 percent cash back when you make purchases and another 1 percent as you pay them off.
If you’re looking for travel miles or points, these cards have generous sign-up bonuses:
- Chase Sapphire Preferred Card: Earn 60,000 bonus points when you spend $4,000 in the first three months.
- Capital One Venture Rewards Credit Card: Earn 50,000 bonus miles when you spend $3,000 in the first three months.
- Hilton Honors American Express Card: Earn 75,000 Hilton Honors bonus points when you spend $1,000 in the first three months.
If you’re charging tuition or fees, a card with a 0 percent introductory APR on purchases could make sense. Just make sure you can pay the card in full before the promotional rate expires to avoid interest charges, says Allec.
See related: Best rewards credit cards
Get more rewards with card-linked offers, cash back stacking
Some rewards cards feature special programs that allow cardmembers to unlock additional savings.
“Both American Express Offers and Chase Offers deliver consumers awesome savings benefits,” says Jackson. “Offers from both cards pop up on random occasion, but when they do, they’re from big national brands that will save their customers hundreds of dollars each year.”
The offer programs are exclusive to your card issuer and the merchants they partner with. But you can cast the net for savings wider by using cash back apps and portals to hunt for deals.
These sites, which include Ebates, Dosh and TopCashback, list cash back promotions from partner retailers. When you shop those merchants and deals through the portal, you can get additional cash back, on top of what you’re earning with your card.
You could increase savings further if you’re able to stack loyalty program rewards with coupons or promo codes.
For example, you might be able to pair a 10 percent off promo code with a 4 percent back deal from a cash back site with 2 percent back on your card. You save the 10 percent up front and can apply the 6 percent cash back as a statement credit against your purchases.
Keep good records and get to know the tax rules
Whether you use a rewards card to pay for college or another method, make sure you leave a paper (or digital) trail. And don’t claim an expense for a tax credit unless you’re certain it’s eligible.
“It’s important to note which expenses are qualified because if an audit reveals you claimed unqualified expenses, you’ll be required to pay the education credit back with interest,” says Allec.
Aside from that, Allec says you could also get stuck with a tax penalty and be barred from claiming education credits going forward.
One last thing to know about tax credits for qualified education expenses is that you can’t double dip.
“You can’t claim both credits for the same expenses,” says Corsello.
Talking to an accountant or other tax expert can help you figure out which credit claim if you’re eligible for both to get maximum tax savings.