What College Expenses Are Tax Deductible?

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

College tuition might be difficult to manage without the help of affluent parents or a full scholarship. Tuition and fees at a public, four-year, in-state institution in the United States averaged $10,560 per year in 2019–2020, as reported by The College Board. 

This number more than doubles to $77,350 in a private institution. Students who took out loans to pay for college graduated with an average of $28,950 in debt.

Even though tuition is expensive and likely to go up in the future, there are options available to help students cope with the rising costs. You may be eligible for a refund of part of that money thanks to tax breaks provided by the federal government.

Discover the ins and outs of tax breaks and credits for higher education costs here. Check out our comprehensive tax guide for assistance with all of your tax questions. Work with a reputable firm like H&R Block to maximize your tax refund if you’re ready to file your return.

Tax Credits for Education

Your tax liability is reduced by the amount of the credit, dollar for dollar. There are two tax breaks listed below that can be used to reduce the cost of college. One of them is even refundable if it reduces your tax bill to zero, meaning you’ll get a refund on top of the tax you have paid.

1. The American Opportunity Tax Credit

Credit on taxes paid of up to $2,500, with a maximum of $1,000 being refundable. Limitations apply; only the first four years of college enrollment are covered.

The American Opportunity Tax Credit (AOTC) is available to taxpayers who have contributed to the cost of qualifying postsecondary education for themselves, their spouses, or their dependents during the first four years of college. Books, fees, and other necessities are all part of the cost of higher education.

The first $2,000 in qualifying costs are fully reimbursable thanks to the AOTC. After that, you can get a credit for 25% of the next $2,000 in qualified expenditures, up to a maximum of $2,500. To the extent that this credit eliminates any tax you owe, you may be eligible for a refund of up to $1,000.

The most important guidelines to remember are as follows:

  • Frequency. The AOTC can only be used once each academic year. You can submit claims for as many qualified students as you have in the same tax year.
  • Capability to Pay Criteria. To receive the maximum credit, your MAGI must be less than $80,000 if you file as single or head of household, or $160,000 if you file as married filing jointly. When you reach certain thresholds, the credit you’re eligible for decreases gradually. Anyone with an adjusted gross income of more than $90,000 ($180,000 for a married couple) will not qualify for the credit.
  • Exceptions. This benefit is not available to married couples who want to file separate tax returns.
  • Refund. If you are eligible for a refund, you can get up to $1,000 based on the maximum return of 40% of this credit.
  • Essentials for Admission. Your dependent must be enrolled at least half-time and have no serious drug offenses to qualify for the credit.
  • Calculations. You can only deduct tuition and fees paid for the current academic year or for a new academic year that begins during the first three months of the current year. Therefore, it is not possible to accrue a greater credit by prepaying tuition for many years in advance. The credit would apply, for instance, to tuition paid in December 2020 for a class that starts in January 2021. However, the AOTC can’t be used for payments made in December 2020 for classes beginning in May 2021.

2. Credit for Lifelong Learning

A nonrefundable tax credit of up to $2,000 for each filing. A lifetime of eligibility is not limited. You can claim a tax credit for the whole cost of attending a qualifying educational institution, including tuition, fees, and needed books and supplies, with the Lifetime Learning Credit. 

A student does not need to be enrolled in a degree program or at least half-time in order to take advantage of this credit, unlike the AOTC, and there is no cap on the number of years they can take it.

If you or your spouse or dependents are required to pay tuition or other fees to the school in order to enroll or attend, you may be eligible for a tax credit for those payments.

The most important guidelines are as follows.

  • Refundability. There is no way to get your money back after using the Lifetime Learning Credit. If the credit reduces your tax liability to zero, you will not be eligible for a refund that is greater than the amount of tax you actually paid.
  • Allowable Costs. You, your spouse, and your dependents can split the maximum benefit of $2,000. It’s calculated on a per-student basis, so it won’t change depending on how many people live in your home. Since the AOTC is claimed on a per-student basis, families with many people enrolled in classes stand to get more money. The payments should correspond to either the academic terms of the current year or those of the next year’s first three months.
  • Limitations. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) cannot be used in conjunction with one another for the same student. One can claim the AOTC for one student and the Lifetime Learning Credit for another if both people in the family have qualified school costs. Between a modified adjusted gross income of $59k and $68k ($112k and $136k for a married couple filing jointly), the credit begins to be reduced. If your expenses are going to be more than that maximum, then you should not apply for credit. If you’re filing your taxes as a married couple, you won’t be able to use this credit.

College expenses can be deducted from taxes

A person’s taxable income is decreased via tax deductions. Your specific tax savings will be determined by your tax bracket. As an illustration, a $1,000 tax deduction would result in a $240 tax savings for someone in the 24% tax bracket. 

Here are two tax breaks that may be useful while paying for college.

3. Interest on student loan deduction

Anywhere from a $2,500 tax credit on every return. Each taxpayer is eligible to deduct up to $2,500 in interest paid on qualified student loans throughout the tax year. This is an “Adjustment to Income” on Schedule 1 of Form 1040, thus it can be claimed regardless of whether or not you itemize.

Interest paid on some student loans that are used for higher education purposes can be deducted. To qualify for the write-off, however, you must be under a contractual obligation to make loan repayments. 

If a family member pays off your student loan but is not compelled to do so, you will receive the tax benefit; they will not.

In addition, if you are claimed as a dependant on someone else’s tax return, you cannot deduct the interest you paid on a student loan. 

To illustrate, if you and your child both list your child as a dependant yet your child is the one actually making the student loan payments, neither of you may claim the deduction.

Because your child is still considered a dependant of yours, they cannot take advantage of the interest deduction even if they are responsible for repaying the loan.

Further guidelines include the following:

  • Limits on Income. When adjusted gross income (AGI) exceeds $70,000 (or $140,000 for married filing jointly), the deduction begins to be phased out. Those having an adjusted gross income (AGI) of more than $85,000 ($170,000 if married and filing jointly) cannot claim a deduction.
  • Restrictions. Loans from family members or employers are not eligible for interest deductions. There must be evidence that the money was utilized for educational purposes, such as school fees, textbooks, or rent. The cost of housing and meals at the university, or an amount decided by the educational institution and included in the federal financial aid assessment, is the upper limit for housing expenditures that qualify. To meet housing costs above and above what is covered by the university’s housing allowance, you may need to take out additional loans, the interest on which is not considered a qualified educational expense.
  • The ability of the Institution. Eligibility for these loans is established at the moment the institutions apply for them. The deductibility of your loan interest will not be affected if the institution loses eligibility at a later date. In general, colleges, universities, vocational schools, and other postsecondary educational institutions that are accredited and qualified to participate in a student aid program managed by the U.S. Department of Education are considered eligible educational institutions.
  • Different Allowable Costs. Credit card interest can be deducted if the card is used only for qualified educational costs, and loan origination fees can be deducted at the time the loan is taken out. When filing as married filing separately, you lose the ability to deduct interest paid on student loans.

The tax credit is welcome, but it’s crucial that you have a firm grasp on your overall financial picture. It is nearly always preferable to forego some of this credit in order to refinance student loans with a business like SoFi, as doing so can result in significant interest savings.

Deductions Associated With Employment

You may qualify for a tax reduction on your school costs depending on your profession or whether or not your company offers tuition reimbursement. Take a look at these employment-related tax benefits for higher education.

4. The deduction for educator costs

An Adjustment to Income on Schedule 1, Line 10 of Form 1040 may be available to you if you worked as a teacher, instructor, counselor, principal, or assistant in an elementary or secondary school for at least 900 hours during the school year.

Costs not covered by other sources are considered eligible educational costs:

  1. Professional development, books, and supplies
  2. Computer equipment and related software or services
  3. Other equipment and supplemental materials for the classroom

If both spouses are teachers in grades K-12, you can deduct up to $500 (or $250 if filing separately) from your taxes. See IRS Tax Topic 458 for more information on the restrictions that apply to this deduction.

5. Educational support from the employer

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the previously available deduction for employees who paid for their own education that was directly relevant to their job duties. 

The majority of itemized deductions for miscellaneous expenses were repealed by the TCJA, therefore this deduction is no longer accessible. However, if your company provides tuition assistance, you may still qualify for a tax deduction.

An EAP is a formal program established by an organization to help its workers further their education. Any educational help provided by the firm up to $5,250 under the plan is not considered taxable income to the employee.

Imagine, for the sake of argument, that you are pursuing an MBA degree that will help you in your current position. An annual maximum of $5,250 may be paid by your company toward your MBA tuition. You don’t have to declare the $5,250 as income since they may take a tax deduction for it.

Bottom Line

Realize that you can’t write off or write off as much of one credit or deduction as you can write off or write off of another. For instance, if you paid for college with a combination of the AOTC and the Lifetime Learning Credit, you cannot claim both. 

If you paid both qualified school expenditures and interest on a qualifying student loan in the same tax year, you are allowed to claim both the education credit and the student loan interest deduction. 

Consult a professional tax preparer, such as those found at H&R Block, if you want advice on how to get the most out of your education-related tax credits.

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