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Taxes & College: Navigating Deductions and Credits to Make Education Affordable

Attending college can be an expensive endeavor, but thankfully, there are several tax incentives provided by the U.S. government to ease the financial burden. By understanding and taking advantage of these deductions and credits, students and their families can significantly lower the overall cost of higher education. Here’s a concise overview of the tax breaks that are available and how you can benefit from them.

American Opportunity Tax Credit (AOTC)

The AOTC is a credit for qualified education expenses for eligible students in their first four years of higher education. As per the IRS, you can claim up to $2,500 per eligible student, and if the credit reduces your tax liability to zero, you may even receive up to $1,000 as a refund. It’s essential to ensure that you, your spouse, or a dependent you list on your tax return is pursuing a degree or other recognized educational credential and is enrolled at least half-time for at least one academic period.

Lifetime Learning Credit (LLC)

Unlike AOTC, which is limited to the first four years, the LLC has no limit on the number of years you can claim it. It can provide a credit of up to $2,000 per tax return for any post-high school education, including undergraduate, graduate, and other courses to develop job skills. However, note that the LLC and AOTC can’t be claimed simultaneously for the same student in a single year.

Student Loan Interest Deduction

Student loans are often a necessary evil of pursuing higher education. Fortunately, students and parents can deduct up to $2,500 of student loan interest paid during the year. This is an “above the line” deduction, which means you don’t have to itemize your deductions to claim it. Remember, the loan must have been taken out solely for paying qualified education expenses to be eligible.

Tax-Free Resources & Saving Bonds

Some students aren’t aware that scholarships, fellowships, and grants are generally tax-free if you’re a degree candidate and use the funds to pay for tuition, fees, and other essential course-related expenses. Also, the interest from Series EE and Series I bonds may be tax-free if used for higher education. There are specific requirements to be met, such as purchasing the bond after you turned 24 and using it for qualified expenses for yourself, your spouse, or your dependent. Your modified adjusted gross income also must be below the limit set by the IRS  in order to take this tax exclusion—as of 2022, the limit is $100,800 for taxpayers filing as single, head of household, or qualifying widow(er), and $158,650 for married taxpayers filing jointly.

Navigating the complex world of taxes as a college student or parent can be daunting, but with the right knowledge, you can take full advantage of the breaks available. Ensuring you stay informed and perhaps even consulting with a tax professional can make your educational journey a little easier on your wallet. For support regarding a variety of tax issues, be sure to visit our contact page where you can get in touch with us through email or phone. If you want to learn about our other services, such as bookkeeping or payroll, don’t hesitate to check out our services page!

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