Is College Tuition Tax-Deductible?
Higher education expenses can be a significant financial investment, but the good news is that the U.S. tax code offers several ways to ease the burden.
Students currently enrolled in college or university, a certificate program, or an associate's degree program can benefit from various tax deductions and tax credits related to higher education, including deductions for self-employed individuals, work-related educational expenses, and tax-advantaged savings plans for college. College graduates working to pay off their student loan debt can also opt into student loan interest deductions.
Investing in education is investing in one's future, and these tax breaks can make the pursuit of knowledge accessible to you. With careful planning and the utilization of the available education tax benefits and incentives, students and families can embark on their educational journeys with greater financial ease and confidence.
To pay for higher education, apply for scholarships. Tax-exempt scholarships and grants are not taxable if they meet certain criteria. Learn more about whether scholarships are taxable income through this exclusive blog post.
You can browse available tax-exempt scholarships today by creating a free Bold.org profile!
Is College Tuition Tax-Deductible?
Up until 2020, the Tuition and Fees Deduction allowed eligible students to deduct up to $4,000 in qualified education expenses from their taxable income. This deduction was a valuable benefit for many, but unfortunately, it was repealed in 2021, leaving students and families seeking alternative options.
So, in short, college tuition is not tax-deductible. However, other tax incentives outside of the Tuition and Fees Deduction can be utilized to ease the financial burden of pursuing higher education. Keep reading to learn more about some of these tax advantages and breaks!
Tax Credits for Undergraduate and Graduate Students
A tax credit is a type of tax incentive provided by the government to encourage certain behaviors or activities among individuals and businesses. Tax deductions reduce the amount of taxable income, while tax credits reduce the amount of tax owed.
In other words, tax credits offer a dollar-for-dollar reduction in tax liability, making them highly valuable and effective in reducing the overall tax burden.
Tax credits come in various forms and can apply to different aspects of personal and business activities, including higher education. Some common types of tax credits include:
Non-Refundable Tax Credits:
Non-refundable tax credits can reduce the amount of taxes owed to zero but cannot result in a tax refund if the credit amount exceeds the total tax liability.
For example, if taxpayers owe $5,000 in taxes and are eligible for a $6,000 tax credit, their tax liability will be reduced to zero, but they cannot receive the remaining $1,000 as a refund.
Refundable Tax Credits:
Refundable tax credits, on the other hand, can not only reduce tax liability to zero but also allow taxpayers to receive a refund for any excess credit amount.
In this case, if a taxpayer owes $5,000 in taxes but is eligible for a $6,000 refundable tax credit, their tax liability will be reduced to zero, and they will receive a $1,000 refund.
Education Tax Credit
Educational tax credits are an example of a personal tax credit designed to benefit individual taxpayers by reducing their tax liability based on specific circumstances.
There are two main types of education tax credits available in the United States:
The Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a popular tax credit that provides financial relief to undergraduate and graduate students.
Unlike a tax deduction, which reduces taxable income, tax credits directly reduce the amount of taxes owed. The Lifetime Learning Credit offers up to a $2,000 credit per tax return, covering 20% of the first $10,000 in eligible education expenses.
Moreover, this credit is available for an unlimited number of years, meaning you can file for the Lifetime Learning Credit every year. You can qualify for the Lifetime Learning Credit if you're modified adjusted gross income (MAGI) is $90,000 or less if you're a single filer and under $180,000 if you're a joint filer.
The American Opportunity Tax Credit
Another significant tax credit is the American Opportunity Tax Credit (AOTC), which is a tax bill specifically designed for undergraduate students. This credit offers a more substantial tax break than the Lifetime Learning Credit, covering up to $2,500 per student for the first four years of post-secondary education.
The student must be pursuing a degree or recognized credential, and their modified adjusted gross income (MAGI) must fall within specific limits to be eligible.
Specifically, to qualify for the American Opportunity Tax Credit, you must have a MAGI of $80,000 or less if you're a single filer or $160,000 or less if you're filing jointly.
Tax Deductions for College Tuition and Fees
As we mentioned previously, the repeal of the Tuition in Fees Deduction in 2021 means that college tuition is not directly tax-deductible. However, self-employed individuals and employees with work-related education expenses may be able to receive tax deductions on their educational costs.
Educational Expenses Deductions for Self-Employed Persons
Entrepreneurs, freelancers, and self-employed individuals can still claim deductions for their higher education expenses.
If the education expenses are directly related to their business or improve their professional skills, self-employed individuals may qualify for deductions.
For instance, attending workshops, conferences, or specialized courses that enhance their expertise may be claimed as business deductions. These include certifications, online programs to learn job skills, books, and transportation fees associated with education.
However, meeting specific criteria and consulting with a tax professional is crucial to ensure compliance with tax laws.
Educational Expense Deductions for Employees
Work-related education deductions are a valuable resource for employees looking to enhance their careers. These deductions allow individuals to claim the expenses incurred when pursuing educational opportunities that enhance their job performance or meet their employer's requirements.
The courses or programs must be directly related to the individual's current position and not to a new trade or business to qualify.
Tax-Advantaged Savings Plans for College
In addition to tax deductions and tax credits, tax-advantaged savings plans are pivotal in making college tuition and fees more affordable for many families.
Two popular options of tax-advantaged savings plans are 529 plans and Coverdell Education Savings Accounts (ESAs). Both plans offer tax-free growth on contributions and tax-free withdrawals when funds are used for qualified education expenses. Furthermore, these flexible plans allow families to start saving for their children's education early on, ensuring a more financially secure future.
529 plans are state-sponsored savings plans that allow individuals to invest in a tax-advantaged savings account to save for higher education expenses.
Although contributions to 529 plans are not tax-deductible as federal tax returns, many states offer income tax deductions or credits for contributions made to their own 529 plans.
Additionally, the earnings in these accounts grow tax-free and remain tax-free when used for qualified education expenses like tuition, fees, books, supplies, and even room and board.
There are two primary types of 529 plans:
a) Prepaid Tuition Plans: These plans allow participants to purchase tuition credits at participating colleges and universities at today's prices, safeguarding against future tuition increases.
b) Education Savings Plans: Education savings plans work more like traditional investment accounts, allowing account owners to choose from various investment options, such as mutual funds, to potentially increase their savings over time.
One of the most significant advantages of 529 plans is that the account owner retains control over the account, meaning they can change beneficiaries or use the funds for qualified expenses beyond just tuition.
Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs are another tax-advantaged option for saving for qualifying education expenses only. These accounts allow individuals to contribute up to $2,000 annually for each designated beneficiary, and contributions are not tax-deductible. Similar to 529 plans, the earnings in a Coverdell ESA grow tax-free and remain tax-free when used for qualified education expenses.
Unlike 529 plans, Coverdell ESAs can be used for both K-12 expenses and higher education expenses, providing greater flexibility for families with younger children. However, there are income limitations for contributing to a Coverdell ESA, and contributions must stop when the beneficiary reaches the age of 18 (unless they have special needs).
Tax-Exempt Scholarships and Grants
Tax-exempt scholarships and grants are financial aids that are not taxable if they meet certain criteria. These funds can cover qualified education expenses without being included in the recipient's taxable income.
Understanding the guidelines surrounding tax-exempt scholarships and grants is essential, as not all types of financial aid fall under this category. The IRS provides specific information on which scholarships and grants are tax-exempt and which may be taxable.
Combining Tax Breaks Strategically
Individuals should explore how different deductions and credits can be combined strategically to maximize the benefits of higher education tax breaks.
For example, it might be advantageous for self-employed individuals to utilize both business-related education deductions and personal tax credits. Parents might also consider optimizing their savings by contributing to 529 plans and Coverdell ESAs for different children to meet their specific education needs.
Frequently Asked Questions about College Tuition and Taxes
Can you deduct tuition paid from the 529 plan?
The earnings on your contributions in a 529 plan grow tax-free, and when you use the money for qualified education expenses, you can make tax-free withdrawals. So, while contributions aren't deductible, the growth and withdrawal of funds for qualified expenses provide significant tax benefits.
Are scholarships tax-exempt?
Not all scholarships are tax-exempt. However, many tax-exempt scholarships and grants cover qualified education expenses without being included in the recipient's taxable income.
For example, scholarships on Bold.org are tax-exempt! You can browse available scholarships by creating a free Bold.org profile!
When should I stop claiming my college student as a dependent?
Normally the IRS does not allow children as financially dependent for more than 18 years. The age limit for college graduates is increased from 21 to 23 for a year of college.
Now that you understand college tuition is tax-deductible, you can apply for tax-exempt scholarships!