As most Americans are well aware, the cost of attending college is hardly cheap — unless you earn yourself a full-ride scholarship. The cost of higher education is a significant financial burden for many families, with tuition and fees, textbooks, and room and board expenses adding up quickly. And, of course, this doesn’t include indirect costs that parents of college students may have to put up, like eating off-campus, shopping, laptops and related technologies, and much more.
In addition to winning scholarships and smart budgeting, you can help reduce the weight of college’s heavy toll thanks to several tax deductions and credits available to help offset these costs. This BrokeScholar article is mainly aimed at the parents of college students, but it’s also open to anyone who generally wants to learn about the topic. So, let’s dig in and discuss the different costs of college that may be tax deductible.
Tuition and Fees Deduction
First off, to make things perfectly clear: There used to be a federal college tuition and fees tax deduction, but it is no longer available as of December 31, 2020. This tax deduction was available for several years due to extensions that Congress had passed. However, beginning with 2021 and later tax returns, it has been repealed. However, the good news is, the Lifetime Learning Credit amounts were increased, and you can still claim this (more about this topic later).
For those who still want to know about the college tuition and fees deduction anyway, the way it worked was that eligible taxpayers could deduct up to $4,000 in qualified education expenses from their taxable income. This deduction can be claimed by the taxpayer, their spouse, or a dependent who is enrolled at an eligible institution.
In order to claim the tuition and fees deduction, you had to meet the following requirements:
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You paid qualified education expenses for higher education.
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You paid the education expenses for an eligible student.
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The eligible student is either yourself, your spouse, or your dependent.
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The eligible student was enrolled at an eligible educational institution.
Qualified education expenses included tuition and fees required for enrollment or attendance at an eligible institution. Room and board, transportation, and personal expenses were not considered qualified education expenses.
Like most, if not all, tax deductions, the tuition and fees deduction was subject to income limitations. For the tax year 2021, the deduction began to phase out at a modified adjusted gross income (MAGI) of $80,000 for single filers and $160,000 for joint filers.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a federal tax credit that provides up to $2,500 per eligible student for qualified education expenses. The credit can be claimed by the taxpayer, their spouse, or a dependent who is enrolled at least half-time in their first four years of postsecondary, aka college, education.
To claim the AOTC, you must meet the following requirements:
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You paid qualified education expenses for higher education.
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You paid the education expenses for an eligible student.
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The eligible student is either yourself, your spouse, or your dependent.
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The eligible student was enrolled at least half-time in a program leading to a degree or certificate at an eligible educational institution.
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The eligible student had not completed the first four years of postsecondary education before the beginning of the tax year.
Qualified education expenses include tuition and fees, course-related books, and supplies required for enrollment or attendance at an eligible institution. Room and board, transportation, and personal expenses are not considered qualified education expenses.
The AOTC is subject to income limitations. For the tax year 2022 (the latest one), the credit begins to phase out at a modified adjusted gross income (MAGI) of $80,000 for single filers and $160,000 for married filing jointly. The credit is also partially refundable, meaning that eligible taxpayers can receive up to $1,000 of the credit as a refund even if they do not owe any tax.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a federal tax credit that provides up to $2,000 per tax return for qualified education expenses. The credit can be claimed by the taxpayer, their spouse, or a dependent who is enrolled in eligible courses at an eligible institution.
To claim the LLC, you must meet the following requirements:
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You paid qualified education expenses for higher education.
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You paid the education expenses for an eligible student.
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The eligible student is either yourself, your spouse, or your dependent.
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The eligible student was enrolled in one or more courses at an eligible educational institution.
Qualified education expenses include tuition and fees, course-related books and supplies required for enrollment or attendance at an eligible institution. Room and board, transportation, and personal expenses are not considered qualified education expenses.
The LLC is subject to income limitations. For the tax year 2022, the credit is gradually reduced (phased out) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000, if you file a joint return). Thus, you can’t claim the credit if your MAGI is $90,000 or more ($108,000 or more, if you file a joint return). Unlike the AOTC, the LLC is not limited to the first four years of postsecondary education and can be claimed for an unlimited number of years.
Student Loan Interest Deduction
Not unlike how you can deduct mortgage interest, you can also deduct student loan interest costs. The student loan interest deduction is a federal tax deduction that allows eligible taxpayers to deduct up to $2,500 in interest paid on qualified student loans from their taxable income. This deduction can be claimed by the taxpayer, their spouse, or a dependent who is legally obligated to pay the interest on a qualified student loan.
To claim the student loan interest deduction, you must meet the following requirements:
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You paid interest on a qualified student loan.
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You are legally obligated to pay the interest on the loan.
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Your filing status is not married filing separately.
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Your modified adjusted gross income (MAGI) is between $70,000 to $85,000 for single filers or $145,000 to $170,000 for joint filers.
Qualified student loans include loans used to pay for qualified education expenses at an eligible institution, including tuition, fees, and room and board. It is important to note that the student loan interest deduction is not available for loans from relatives or employers. It should be noted that if your MAGI is $85,000 or more ($175,000 or more if you file a joint return), then you cannot claim this tax deduction.
Employer Educational Assistance
Employer educational assistance is a tax benefit provided by some employers that allows employees to exclude up to $5,250 per year in employer-provided education assistance from their taxable income. This benefit can be used to pay for qualified education expenses, including tuition, fees, books, and supplies.
To qualify for employer educational assistance, the employer must have a written plan that meets certain criteria established by the Internal Revenue Service (IRS). The education assistance must also be provided under a written plan that does not discriminate in favor of highly compensated employees.
The Bottom Line on College Costs With Tax Benefits
Thus, while unfortunately the college tuition and fees tax deduction is no longer available, there are several costs of college that carry tax benefits. Most of these tax benefits are tax credits, which are very useful when it comes to tax season. Tax credits reduce the actual amount of tax you owe, providing you with a dollar-for-dollar reduction of your tax liability. So, if you quality for up to a $2,500 tax credit via American Opportunity Tax Credit (AOTC), then it takes $2,500 of your tax return.
On the other hand, a tax deduction reduces your taxable income, which in turn reduces the amount of taxes you owe; a tax deduction indirectly reduces your taxes while a tax credit directly reduces what you owe. Either way, still take advantage of the student loan interest deduction if you can, since both tax deductions and tax credits can help lighten your financial load come tax season.
