Many families struggle with paperwork for both college tuition and taxes. There are endless forms from the IRS and college financial aid applications...but but the good news is one may benefit the other.
Are college expenses tax deductible? If you’re a parent sending a student off to college, or a student paying your own way, you may wonder which educational expenses can offer tax benefits come April. With higher education tuition and fees getting more expensive each year, many taxpayers are looking for ways to reduce the cost of college--and with deductions and credits from the IRS, you may be able to use your tax return to get a higher refund.
To maximize your tax breaks, make sure you know which qualified educational expenses the IRS allows you to claim, and which aren’t eligible for a deduction. Can college tuition be deducted from taxes? Are college scholarships taxable? What’s the American Opportunity Tax Credit? Let’s go over everything college tuition and taxes to see where you can deduct and get some much-needed money back.
Note: The following qualified education expenses are updated as of spring 2018 and are intended for informational purposes only. If you have questions about your specific circumstances, such as eligibility for a specific educational credit or tax deduction, consult a licensed tax professional.
Is college tuition tax deductible for parents? Semantics are important here: College tuition can save you money at tax time not necessarily as a deduction, but as a tax credit. The American Opportunity Credit (AOTC) offers a maximum annual credit of $2,500 annually for qualified educational expenses.
Qualified educational expenses include money paid for tuition, fees, and other required expenses (e.g., student activity fees) needed for students to enroll at an eligible educational institution during the tax year or the first three months of the next year.
Eligible taxpayers are parents of student dependents, where students are enrolled at least half-time for at least one academic period (e.g., semester, trimester, etc.) at the beginning of that tax year, and have not yet finished the first four years of higher education at the beginning of that tax year. Note, too, that taxpayers cannot request the American Opportunity Credit for more than four tax years, and claimants cannot have been convicted of any drug-related felony at the end of the tax year.
In order to claim the full tax credit, your modified adjusted gross income must be $80,000 or less ($160,000 or less if married filing jointly). You can request a reduced credit if your modified adjusted gross income is more than $80,000 but less than $90,000 (or more than $160,000 but less than $180,000 if married filing jointly). Taxpayers earning more than $90,000 (single) or $180,000 (married filing jointly) do not qualify.
Note: You are not able to claim two tax breaks at once. So, for example, if you’re paying for your student’s college tuition tax-free out of a 529 savings plan, you cannot also claim the American Opportunity Credit.
The requirements for a Lifetime Learning Credit are a little more flexible than the American Opportunity Credit: With a maximum of $2,000 per tax return, the Lifetime Learning Credit can be requested by eligible students to cover qualified tuition and related expenses at an eligible educational institution. Undergraduate, graduate, and professional degree programs are eligible, including career development classes, and there are no limits to the number of years the credit can be claimed.
In order to claim a Lifetime Learning Credit, you must be paying qualified education expenses for higher education for yourself, your dependent, or a third party; you, your dependent, or a third party must be enrolled at an eligible education institution; and the eligible student (whether it’s you, your spouse, or your dependent) are listed on your tax return. Taxpayers must meet all three requirements in order to claim the Lifetime Learning Credit. (Not sure if you qualify? The IRS has put together a handy app to help taxpayers determine eligibility.)
Similar to the American Opportunity Credit, you’re not able to request more than one tax credit for the same expenditures. Go over the fine print to ensure you choose the credit that’s most advantageous to your circumstances.
Are College Books Tax Deductible?
Under the American Opportunity Credit, college books that are required for a class or other course of study are considered part of qualified education expenses. Books do not need to be purchased at the on-campus bookstore or via the college directly; where they’re acquired isn’t of interest. The main qualification is that the college textbooks need to be necessary to complete a class, lab, or field work.
Are College Tuition Grants Taxable?
If you’ve received a grant specifically to cover your college tuition, this is categorized within qualified education expenses and is not taxable.
Are College Scholarships Taxable?
Your college scholarships may be taxable, depending on what they cover. For example, if your college scholarships cover tuition, books, and other required fees, the IRS considers those qualifying education expenses and they won’t be taxed. But if your scholarships cover room and board, utilities, or non-required expenses, they will be taxed.
Are College Stipends Taxable?
Similar to scholarships, stipends may be taxed. For example, if you receive a financial aid package with a stipend (e.g., $10,000 with $5,000 allocated for research or teaching), the $5,000 portion for services rendered will be considered taxable income.
Are College Loans Tax Deductible?
If you’ve taken out a loan for yourself, your spouse, or a dependent to cover qualifying education expenses, you can take a tax deduction for any student loan interest paid. Loans can be federal or private and the maximum deduction is $2,500 per year.
Note, however, that the IRS is pretty strict about who can claim the student loan interest deduction. Taxpayers must have paid interest on a qualified student loan during the tax year you’re filing under, have been legally obligated to pay interest on the qualified student loan, not be “married filing separately”, not be claimed as a dependent on someone else’s tax return, and have a modified adjusted gross income of $65,000 or less ($135,000 for married filing jointly) for the maximum deduction. (Taxpayers earning $80,000 or less or $160,000 for married filing jointly can claim a reduced deduction.) If even just one of those requirements doesn’t apply to you, you’re not eligible to claim the student loan interest tax deduction.
Are College Visits Tax Deductible?
While it would be nice for students to deduct the (often pricey) cost of travel and accommodations for campus tours, college visits are not tax deductible.
Are College Endowments Taxed?
Under the tax law passed at the end of 2017, universities and colleges with endowments larger than $250,000 per full-time student will now be subject to a 1.4 percent excise tax. If the university or college your student attends is now paying more in taxes each year, you may see that reflected in your annual tuition bill. Speak to your college’s financial aid office if you’re concerned the higher tax obligations may trickle down to students and families in the form of fees and/or tuition hikes.
