Key Tax Breaks for Graduate Students

Pursuing a graduate degree represents a significant investment, and understanding the associated tax implications can provide financial relief. The U.S. tax code offers several provisions for students, including tax credits and deductions that can lower your overall tax liability. These benefits are designed to make higher education more accessible by reducing the financial burden.

Education Tax Credits

Tax credits are valuable because they provide a dollar-for-dollar reduction of your tax liability. For graduate students, the most relevant is the Lifetime Learning Credit (LLC). This credit is designed for individuals pursuing undergraduate, graduate, and professional degree courses, including those taken to acquire or improve job skills. There is no limit to the number of years you can claim the LLC, making it a suitable option for lengthy graduate programs.

The LLC allows you to claim 20% of the first $10,000 in qualified education expenses, up to a maximum of $2,000 per tax return. Qualified expenses are limited to tuition and fees required for enrollment at an eligible educational institution. Expenses for books, supplies, and equipment only qualify if they are required to be paid to the institution as a condition of enrollment.

Eligibility for the LLC is subject to income limitations. For the 2024 tax year, the credit begins to phase out for single filers with a modified adjusted gross income (MAGI) between $80,000 and $90,000, and for joint filers with a MAGI between $160,000 and $180,000. You cannot claim the credit if your MAGI is $90,000 or more for single filers, or $180,000 or more for joint filers. You also cannot claim the LLC if your filing status is married filing separately or if you are claimed as a dependent on someone else’s return.

The American Opportunity Tax Credit (AOTC) is not available for most graduate students. The AOTC is restricted to the first four years of postsecondary education for students pursuing a degree at least half-time. Since most graduate students have already completed four years of undergraduate study, they do not qualify for the AOTC.

Available Tax Deductions

Graduate students may be able to take advantage of tax deductions, which lower your taxable income. The most prominent is the student loan interest deduction. This allows you to deduct the lesser of $2,500 or the actual amount of interest you paid during the year on a qualified student loan. This is an “above-the-line” deduction, meaning you do not need to itemize to claim it.

To qualify for the student loan interest deduction, you must have paid interest on a loan taken out solely for qualified higher education expenses. You must be legally obligated to pay the loan, and you cannot be claimed as a dependent on someone else’s tax return. The deduction is also subject to income limitations. For the 2024 tax year, the deduction is gradually reduced for single filers with a MAGI between $80,000 and $95,000, and for joint filers with a MAGI between $165,000 and $195,000.

Another deduction students may search for is the Tuition and Fees Deduction, but this has expired and is no longer available. Congress last extended it through the end of the 2020 tax year, and it has not been renewed since. Attempting to claim this expired deduction could lead to errors on your tax return.

Tax Treatment of Scholarships and Fellowships

Many graduate students receive scholarships, fellowships, or grants. The tax treatment of these funds depends on how they are used. These awards are tax-free if you are a candidate for a degree and use the money for qualified education expenses, which include tuition, required fees, books, supplies, and equipment for your courses.

Any portion of a scholarship or fellowship used for non-qualified expenses is considered taxable income. This includes funds spent on expenses like room and board, travel, or optional equipment. For example, if you receive a $20,000 scholarship and your tuition and required fees are $15,000, the remaining $5,000 used for living expenses must be reported as gross income.

If you receive payment for services such as teaching or research as a condition of your scholarship or fellowship, that amount is taxable. These payments are considered compensation for your work and should be treated as wages. Your university may issue you a Form W-2 for these services, and you would report this income as you would with any other job.

Employer-Provided Educational Assistance

Some graduate students receive financial support from their employer. Under Section 127 of the tax code, employers can offer educational assistance as a tax-free benefit. If your employer has a qualified educational assistance program, you can receive benefits without that money being included in your taxable wages.

Under a Section 127 plan, an employer can provide up to $5,250 per employee, per calendar year, for educational expenses. This amount is excluded from your income and is not subject to income or payroll taxes. The courses you take do not need to be related to your job for the benefits to be tax-free, and the provision applies to both undergraduate and graduate-level coursework.

This benefit must be provided under a formal written plan established by your employer. A temporary provision allows these funds to be used for payments on qualified student loans, but this expansion is set to expire at the end of 2025. Any assistance you receive from your employer above the $5,250 annual limit is considered taxable income.

Required Information and Claiming on Your Return

To claim education-related tax benefits, you will need specific documentation. The primary document is Form 1098-T, Tuition Statement. Your educational institution is required to send this form to you if you paid qualified tuition and related expenses. Box 1 of this form shows the total payments your school received, while Box 5 reports the amount of scholarships or grants you received.

The amounts on Form 1098-T may not be the final numbers you use on your tax return. You should also keep personal records of any other qualified expenses you paid that are not included on the form, such as the cost of required books or equipment purchased from a vendor other than your school. These records are necessary to accurately calculate your credits or deductions.

To claim the Lifetime Learning Credit, you must complete Form 8863, Education Credits, and attach it to your Form 1040. This form will guide you through the calculation of the credit based on your qualified expenses and income.

The student loan interest deduction is claimed as an adjustment to your income on Schedule 1 of Form 1040. Your loan servicer should send you Form 1098-E, Student Loan Interest Statement, if you paid $600 or more in interest during the year. You will use this form to report the deductible amount on Schedule 1.