College isn't cheap. However, depending on your situation, you might be eligible to deduct all or a portion of tuition costs when you file your taxes. But, because the tax code contains multiple education tax credits for higher education costs, you need to know how they work to make sure you're maximizing your tax breaks.
In the past, you could deduct college expenses using the Tuition and Fees Deduction. But this deduction was phased out in 2020, and instead there are several college credits that have expended instead. Here are the two main credits currently available for college expenses:
The American Opportunity Tax Credit (AOTC) allows you to earn up to $2,500 in tax credits when claiming your college tuition and related expenses. Your first $2,000 for qualified education expenses qualify for the credit, then 25% of the next $2,000 spent. So if you have $4,000 or more in qualified expenses, you can get the full $2,500 tax credit. The credit is also partially refundable-allowing you to claim 40% of the credit for a refund, up to $1,000 total.
To be eligible for the American Opportunity Tax Credit, you'll need to be:
You also can't have claimed the AOTC or previous Hope credit for a total of four years in the past. And you can't be convicted on a drug felony charge in the year you claim the credit.
The Lifetime Learning Credit is for individuals pursuing continuing education related to their current job or career. The credit is available up to $2,000 annually with no limit to the amount of times you can claim it. The credit is available for 20% of your first $10,000 in qualifying expenses. You can claim qualifying educational expenses for undergraduate, graduate, or professional degree education.
To qualify for the Lifetime Learning Credit, you'll need to:
Not all expenses you pay when attending college or continuing education courses qualify for a tax credit or deduction. Here are the types of expenses that qualify for tax credits:
And while tuition you pay always counts as a qualified expense as long as you're paying it -- if it's paid by a tax-free scholarship, grant or fellowship, those costs don't qualify for the tax deduction.
Clarify which costs (e.g., room and board, transportation) are not deductible.
Many education-related expenses don't qualify for education credits or deductions. Here are a few common expenses you might pay when attending school, but cannot claim on your tax return:
If you are filing for the Lifetime Learning Credit, you may be able to claim sports and activity fees, or non-credit course fees-only if these activities help you acquire or improve your job skills.
To claim your tax credit or deduction on your tax return, you'll first need to review your numbers on IRS Form 1098-T sent to you by your education institution. It will include the amounts of qualified education and related expenses, plus any adjustments, scholarship or grant payments, and your enrollment status. After receiving this form, here's how to claim your credits:
To claim this credit, you'll need to complete IRS Form 8863. You'll need to input your total tuition and education expenses, your income, filing status, and information about your school. You can then calculate the amount you are eligible to claim on your return. If you're using tax software, it will ask you questions about your expenses, details of form 1098-T, and information about your school.
Similar to the AOTC, for claiming the Lifetime Learning Credit, you'll need to complete IRS Form 8863. This includes details of your school, total tuition and education expenses, your income, filing status, and qualifying questions. If you're using tax software, fill out the details of form 1098-T and answer any related questions to see how much you qualify for.
Highlight credits for parents supporting children in college.
If you are helping to pay for your child's college education, you can claim tax credits to help lower your tax bill (or receive a refund). If your student is living at home or is claimed as a dependent on your tax return, you can file IRS Form 8863 and claim either the American Opportunity Tax Credit or Lifetime Learning Credit for qualifying education expenses paid for your child.
If you are helping to pay for your child's college education, you can claim tax credits to help lower your tax bill (or receive a refund). If your student is living at home or is claimed as a dependent on your tax return, you can file IRS Form 8863 and claim either the American Opportunity Tax Credit or Lifetime Learning Credit for qualifying education expenses paid for your child.
To qualify to claim your child's education expenses, you'll need to prove they are a qualifying dependent that rely on you for at least 50% of their expenses or support. And they must be age 24 or younger if they are a full-time student.
Include any relevant education savings plans (e.g., 529 plans) or further tax relief options.
529 plans. If you're saving for college expenses for your children, opening a 529 plan for your kids may come with some tax benefits. Many 529 plans let you deduct contributions from your state income taxes, plus the growth and withdrawals are tax-free when used for qualifying education expenses.
Student loan interest. If you take out student loans to pay for college, you might qualify for the student loan interest deduction. This deduction allows you to reduce your taxable income by up to $2,500 per year. To qualify for the deduction, the interest deducted must be paid during the year, you can't file as married filing separately, you and your spouse can't be claimed as a dependent by another taxpayer and your modified adjusted gross income can't exceed the annual limits.
If you're paying for college, make sure to take advantage of the all the deductions and credits available to you. Whether it's using a 529 plan to save, claiming the AOTC or Lifetime Learning credits, or deducting student loan interest-you may be able to save thousands of dollars on your taxes. But the tax code is constantly changing, and it may be prudent to hire a licensed tax professional to help you navigate claiming your tax deductions and credits to make sure you get the full amount.