College Tuition Tax Deduction: How It Works

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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.

Tax Credits for Tuition and Education Expenses

College tuition is not currently tax deductible under federal law, but you may still qualify for credits that reduce your tax bill.

In the past, you could deduct college expenses using the Tuition and Fees Deduction. But this deduction was phased out in 2020, and instead, several college credits have expanded.

Here are the two main credits currently available for college expenses:

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit 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:

• Pursuing a degree or educational certificate
• Enrolled at least half-time for at least a single academic period in the year you claim the credit
• Within the first four years of college

You also can’t claim 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.

Lifetime Learning Credit

The Lifetime Learning Credit is for people 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:

• Be enrolled or taking classes at an eligible education institution
• Be pursuing a degree or professional certificate for your career, or to get or improve job skills
• Be enrolled for at least one academic period beginning in the tax year (semester, trimester, or quarter)

Qualified College Tuition Expenses

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 which ones don’t.

Qualified for tax credits:

• Tuition and fees
• Books, supplies and equipment
• Certain prepaid education expenses

Tuition 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.

Not qualified for tax credits:

• Room and board
• Insurance
• Transportation
• Medical expenses and fees
• Personal living expenses
• Sports or activity fees
• Non-credit course fees

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.

How To Claim Education Tax Credits

To claim your tax credit on your tax return, you’ll first need to review your numbers on the IRS Form 1098-T sent to you by your education institution. It will include the 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:

Claiming the American Opportunity Tax Credit and Lifetime Learning Credit

Here are the steps you’ll take:

1. Use IRS Form 1098-T to find qualified expenses
2. Complete IRS Form 8863
3. Submit the form with your tax return (manual or through tax software)

To claim either credit, as mentioned, 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.

Education Tax Breaks for Parents

Parents may claim education credits for a dependent child if they meet IRS guidelines

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.

Here are the conditions to qualify to claim your child’s education expenses:

• Child is under age 24 and a full-time student
• Parent claims them as a dependent
• Parent pays over 50% of their financial support

Other Education Expenses That May Qualify

If you’re paying off student loans or funding a 529 plan for your child, you could qualify for other deductions:

529 Plan Contributions

A 529 plan can help you save up for college expenses for your children. Plus, it 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 Deduction

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.

The Bottom Line

You can’t deduct college tuition, but you may qualify for tax credits and other education-related benefits. If you’re paying for college, take advantage of 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.

It’s also 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. At the least, check current IRS rules each year to make sure nothing has changed that may apply to you.

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