A college tax credit is a great way to make paying for college more affordable, by significantly reducing the amount of tax you need to pay. You can also access tax deductions to lower your taxable income and so reduce the amount of tax you need to pay, as well as access other tax advantages such as using a 529 account for your college savings.
Taking advantage of these tax breaks is one of the best things you can do to make college more affordable. Maximizing your tax benefits through credits and deductions can represent significant savings over the long term, especially when you start early. You can also receive a lot of tax benefits if you save for college in a 529 plan.
What Are College Tax Credits?
The federal government offers a range of tax breaks designed to help families save and pay for college. These include tax credits, as well as a number of tax deductions. The main difference between tax credits and tax deductions is that credits are discounted from the amount of tax you owe, rather than reducing your taxable income.
In this way, tax credits are even more advantageous than tax deductions, because you can take the full amount off the tax you need to pay. The two main college tax credits are the American Opportunity Tax Credit and the Lifetime Learning Credit. Depending on your individual situation, you may be able to use other tax credits like the Earned Income Tax Credit for your or your child’s college expenses.
What Are College Tax Deductions?
Another form of a tax break offered by the federal government to encourage college savings is tax deductions. Deductions reduce your taxable income, meaning that you don’t need to pay tax on all of your income.
Although not as beneficial as tax credits, tax deductions can also significantly reduce the amount of tax you need to pay, so you can put that money towards college savings, or whatever you would like! Furthermore, using tax deductions to lower your tax liability will mean you have a lower adjusted gross income, which could give you access to other tax deductions and credits.
College Tax Credits for Students
The two college-specific tax credits available to students and parents are the American Opportunity Tax Credit and Lifetime Learning Credit. Both need to be claimed through Form 8863, using the information you’ll find on your Form 1098-T, which your school will send to the student. However, keep in mind that you can only claim one of these tax credits within the same tax year, not both.
You may also be able to apply the earned income tax credit to your college expenses. Let’s take a look at each of these tax credits, their limits, and eligibility.
1. American Opportunity Tax Credit
You can claim the American Opportunity Tax Credit (AOTC) on 100% of the first $2,000 of your college tuition and expenses. You can also claim 25% of the next $2,000 in tuition and related expenses, up to a maximum of $2,500 per year. Note that eligible expenses are limited to tuition, mandatory fees, and course materials. You cannot claim the credit for nonrequired fees or expenses such as room and board, insurance, and medical care.
This tax credit is means-tested, so is not available to higher-income earners: the AOTC is phased out for single incomes between $80,000 and $90,000, and for married taxpayers filing jointly who earn between $160,000 and $180,000 per year. To qualify, students will need to attend a degree program at least half-time. Additionally, the credit can’t be claimed in more than four tax years for the same student and students can’t have finished four years or more of academic study before the start of the taxable year.
As an extra bonus, eligible taxpayers can get a refund on as much as 40% of the credit. To be eligible, you need to be past the “kiddie tax” age of 18 years old, or 24 years for full-time students. In this case, even if you have no tax liability after applying for the AOTC credit, you could get a refund of up to $1000.
2. Lifetime Learning Credit
Under the Lifetime Learning Credit (LLC), taxpayers can claim a credit for tuition and mandatory fees for their college education. The credit is available for 20% of tuition and mandatory fees paid, up to a total tax credit of $2000 per year.
For the 2023 tax year, the LLC is phased out for single incomes of $80,000 to $90,000, or married taxpayers filing jointly for a combined income of $160,000 to $180,000. Remember that the AOTC and the Lifetime Learning Credit are mutually exclusive: you can only claim one of the same student’s expenses within the same tax year.
The disadvantages of the LLC compared to the AOTC are:
- Annual limit of $2,000, rather than $2,500 for the AOTC
- Only 20% of expenses can be claimed, instead of 100% for the first $2000 with the AOTC
- It’s nonrefundable
On the other hand, the Lifetime Learning Credit is more flexible in that there are no requirements for the student to be studying towards a degree, no minimum enrollment (the AOTC requires the student to be enrolled at least half-time), and no limit on the number of years you can access this tax credit. This makes the LLC a good option for students studying career development courses or pursuing a degree less than half-time and those who’ve already completed more than four years of study.
3. Earned Income Tax Credit
Although the earned income tax credit (EITC) isn’t specific to education, it can be applied to college expenses. The credit is available to low-income earners, and exact thresholds vary depending on your income, marital status, and the number of dependent children you claim on your return: you can check if you’re eligible using the IRS’ EITC Assistant.
Many students won’t meet this criterion, and cannot access the credit if they’re listed as a dependent on someone else’s return. However, recent graduates with low income and no children may be able to take advantage of this credit and reduce their tax bill.
The maximum credit is $7,430 for 2023, and it’s also refundable, so you could get a refund even if the credit brings your tax obligation down to zero. You’ll need to submit Form 1040 to claim the EITC.
College Tax Deductions for Students
There are a few different ways you can claim deductions on your tax return for your tertiary education, whether a college tuition tax deduction or general expenses associated with your education.
1. Tuition and Fees Deduction
The tuition and fees deduction previously allowed students and parents to deduct college tuition, fees, and other education expenses above the line in order to lower their adjusted gross income (AGI) for tax. However, this deduction was officially repealed in 2021, so you can only claim it up to the 2020 tax year.
2. Student Loan Interest Deduction
You can deduct student loan interest paid on debt incurred for your own college education or that of your spouse or a dependent while the student is enrolled in a degree program at least half-time. You can claim a deduction of up to $2,500 per year.
Like many tax breaks, this deduction is phased out for higher incomes, in this case for single incomes between $75,000 and $90,000 and $150,000 to $180,000 for married taxpayers filing jointly for 2023. If your parent or guardian claims the deduction on their tax return for you as a dependent, you cannot claim it on your own return – in short, this deduction can only be claimed once.
College Tax Credits and Deductions for Parents
Parents can claim the AOTC or LLC for their children, as long as the child is considered a dependent. As a parent, you can claim the same amounts on your dependent child’s tuition and mandatory fees, that is:
- American Opportunity Tax Credit (AOTC): 100% of the first $2000 of tuition and mandatory fees up and 25% of the second $2000, to a total of $2500 per year per dependent child.
- Lifetime Learning Credit (LLC): 20% of tuition and mandatory fees, up to a total of $2000 per year per dependent child.
Because of the “kiddie tax” age limitation, parents are more likely to be able to get a refund on the AOTC. Spouses can also claim the LLC for their partner’s education expenses, as long as the student doesn’t claim the credit on their own tax return.
However, keep in mind that it’s forbidden for you and your child to both claim a tax credit on the same expenses. Therefore, if you claim your child as a dependent on your tax return for this or any other purpose, they are not allowed to claim the AOTC or the LLC on their own return.
Parents can also use the earned income tax credit if they meet the qualifying criteria. Generally, this will be most beneficial for parents with two or more qualifying children, as income limits are much higher in this case.
Tax Benefits of College Savings Accounts
Another way to access federal tax breaks and make it easier to save for college is through a tax-advantaged college savings account such as a 529 savings plan. Under these plans, you make contributions that are invested on your behalf, letting your savings grow over time.
529 savings accounts come with a number of tax advantages, such as tax-deferred earnings and tax-free distributions.
Opening a 529 Account
Under a 529 account, the earnings on your investments grow tax-deferred, meaning that you don’t need to pay tax until you make a withdrawal, and won’t pay tax at all on qualified withdrawals. That is to say, you don’t need to pay tax when you withdraw funds from your 529 plan, as long as you spend this money on qualified education expenses and stay within annual limits.
Qualified education expenses include college tuition, room and board, and education supplies, as well as elementary and secondary school tuition. You can withdraw up to $10,000 per year for qualified elementary and secondary school expenses, and unlimited withdrawals for qualified college expenses. You can also withdraw 529 savings tax-free for student loan repayments, up to a lifetime limit of $10,000 per borrower.
It’s best to start as early as you can, as the earlier you invest in a 529 savings plan, the more time your investment has to grow. Having said that, it’s never too late to open a 529 plan and make use of its tax advantages.
For more advice on choosing the right 529 plan for you, take a look at this guide.
The Bottom Line
Claiming a college tax credit can help make paying for college more affordable, especially when you combine this with tax deductions and tax-advantaged savings account like a 529 savings plan.
There are two main types of tax credits available to college students and their parents: the AOTC and the LLC. While the AOTC offers slightly more benefits and allows you to claim more of your college tuition and mandatory fees as a tax credit, the LLC is more flexible and may be available to you if you don’t qualify for the AOTC.
For more advice, take a look at this guide to filing your tax return as a college student.
Frequently Asked Questions (FAQs)
Do you get a tax credit for paying college tuition?
It is possible to get a tax credit when you pay college tuition. You can claim a tax credit for your college tuition, or your dependent child’s college tuition, either through the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). However, you cannot claim both for the same expenses during the same tax year.
How much tax credit do you get as a parent for a college student?
If your child is classified as a dependent student, you can claim the full AOTC or LLC tax credit. That is, up to $2,500 for the AOTC or $2,000 for the LLC per year.
What are the qualifications for the education tax credit?
There are two main tax credits that are lumped into the generic term “education tax credit.” To claim with the AOTC or you either need to be at least a half-time student working towards a college degree, or have a dependent child who is. Additionally, the student can’t have completed more than four years of college study by the beginning of the tax year.
The lifetime learning credit is a little more relaxed: you, your dependent child, or your spouse just needs can be enrolled in any tertiary study, including career development courses, with no minimum credit requirement and no maximum length of study. Both types of a tax credits do have maximum income limits for the taxpayer and are phased out above certain annual income levels.
