Does Being a Student Help With Taxes?

Being a student often involves significant financial outlays. The tax code offers various provisions, including credits and deductions, that can provide financial relief to students or their families. Understanding these tax benefits can help offset the burden of educational pursuits. Eligibility depends on factors such as enrollment status, type of expenses, and income levels.

Key Education Tax Credits

The federal tax system provides tax credits that directly reduce the amount of tax owed for qualified education expenses. Two primary credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Each has distinct eligibility rules and benefits. Taxpayers cannot claim both credits for the same student in the same tax year.

The American Opportunity Tax Credit (AOTC) is available for eligible students during their first four years of higher education. To qualify, a student must be pursuing a degree or recognized educational credential and be enrolled at least half-time for one academic period during the tax year. This credit can provide a maximum annual benefit of $2,500 per eligible student. It is calculated as 100 percent of the first $2,000 of qualified education expenses and 25 percent of the next $2,000 of expenses.

Qualified education expenses for the AOTC include tuition, required fees, and course materials like books, supplies, and equipment needed for enrollment. Expenses for room and board, transportation, or medical insurance do not count. The credit is partially refundable; if it reduces a taxpayer’s liability to zero, up to 40 percent of any remaining credit, or a maximum of $1,000, may be refunded. For 2025, the full credit is available to taxpayers with a Modified Adjusted Gross Income (MAGI) of $80,000 or less ($160,000 for those married filing jointly), with a phase-out at higher income levels.

To claim the AOTC, taxpayers generally need a Form 1098-T, Tuition Statement, from the educational institution. This form reports qualified tuition and related expenses. Taxpayers should review it for accuracy and contact the institution if incorrect, as it substantiates the credit. Filing Form 8863, Education Credits, is required to claim this benefit.

The Lifetime Learning Credit (LLC) supports a broader range of educational pursuits. It is available for courses taken at an eligible educational institution to acquire or improve job skills, or for undergraduate and graduate degree programs. Unlike the AOTC, there is no limit on the number of years the LLC can be claimed, and the student does not need to be pursuing a degree.

The maximum LLC is $2,000 per tax return, not per student. It is a non-refundable credit, meaning it can reduce tax liability to zero but no portion will be refunded. The credit is calculated as 20 percent of the first $10,000 in qualified education expenses paid. Qualified expenses include tuition and required fees. Books, supplies, and equipment are qualified only if paid directly to the school as a condition of enrollment.

Eligibility for the LLC is subject to income limitations. For 2025, the credit begins to phase out for taxpayers with a MAGI between $80,000 and $90,000 ($160,000 and $180,000 for those married filing jointly). When considering which credit to claim, the AOTC generally offers greater tax savings per dollar of expenses for students in their first four years of post-secondary education due to its higher maximum value and refundable portion.

Important Education Tax Deductions

Beyond tax credits, certain education-related expenses can be eligible for tax deductions, which reduce the amount of income subject to tax. The Student Loan Interest Deduction is frequently utilized by students and former students. This deduction allows taxpayers to subtract a portion of the interest paid on qualified student loans from their gross income.

The Student Loan Interest Deduction permits eligible taxpayers to deduct up to $2,500 of interest paid on qualified student loans annually. This is an “above-the-line” deduction, meaning it can be claimed even by taxpayers who do not itemize, directly reducing their taxable income.

To qualify for this deduction, several conditions must be met. The loan must have been taken out solely to pay for qualified higher education expenses for the taxpayer, their spouse, or a dependent. These expenses include tuition, fees, room and board, books, supplies, equipment, and transportation. The taxpayer claiming the deduction must be legally obligated to pay the interest. Neither the taxpayer nor their spouse (if filing jointly) can be claimed as a dependent on someone else’s tax return.

Loan servicers typically provide Form 1098-E, Student Loan Interest Statement, by January 31st if $600 or more in interest was paid. This form details the interest paid and is important for calculating the deduction. Taxpayers can include interest payments not reported on Form 1098-E as long as the interest was paid on a qualified loan.

The deduction is subject to income limitations, which can reduce or eliminate the benefit for higher earners. For 2025, the deduction begins to phase out for single filers with a Modified Adjusted Gross Income (MAGI) exceeding $85,000 and is completely phased out at $100,000. For those married filing jointly, the phase-out starts at a MAGI of $170,000 and is fully eliminated at $200,000.

Taxation of Student Income and Dependency Status

A student’s tax situation is shaped by how their own income is taxed and whether they can be claimed as a dependent. This impacts the student’s individual filing requirements and who can claim education-related tax benefits. Understanding dependency rules is important for maximizing overall tax savings for the family unit.

Scholarships and grants are a common form of financial aid, and their taxability depends on how the funds are used. Amounts used for qualified education expenses, such as tuition, required fees, books, supplies, and equipment necessary for courses, are generally tax-free. This applies if the student is a candidate for a degree at an eligible educational institution.

However, any portion of a scholarship or grant used for incidental expenses, such as room and board, travel, or optional equipment, is considered taxable income. Amounts received as payment for services, like teaching or research, are also taxable. Any taxable portion of a scholarship or grant must be reported as income on the student’s tax return.

Students who earn income from jobs may need to file their own tax return. Filing requirements depend on gross income, but even if not required, filing can recover any withheld federal income taxes. The standard deduction for a dependent student is limited; for 2025, it cannot exceed the greater of $1,350 or their total earned income plus $450.

The concept of dependency status impacts who can claim education tax benefits. A student can often be claimed as a “qualifying child” dependent by a parent or other taxpayer if certain tests are met. These tests include:

• A relationship test (e.g., child, stepchild, foster child, sibling)
• An age test (under 19 or under 24 if a full-time student)
• A residency test (lived with the taxpayer for more than half the year)
• A support test (did not provide more than half of their own support)

If a student can be claimed as a dependent by another taxpayer, the student generally cannot claim their own education credits or certain other tax benefits. Instead, the parent or other taxpayer who claims the student as a dependent is eligible to claim the education tax credits or deductions, provided all other eligibility criteria are met. This ensures tax advantages are applied where the primary financial support for the student resides.