What Tax Breaks Can College Students Claim?

The U.S. tax code provides benefits for higher education costs that can reduce the amount of tax owed. A tax credit offers a dollar-for-dollar reduction of a tax bill, while a tax deduction lowers the amount of income subject to tax. The specific benefits a person may qualify for depend on factors like income, enrollment status, and the types of expenses paid.

Available Education Tax Credits

Two tax credits are available for education expenses: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum annual credit is $2,500 per eligible student, calculated as 100% of the first $2,000 and 25% of the next $2,000 of qualified expenses.

To be eligible for the AOTC, the student must be pursuing a degree or other recognized education credential, be enrolled at least half-time for at least one academic period, and not have a felony drug conviction. A feature of the AOTC is that it is partially refundable. This means that if the credit reduces a taxpayer’s liability to zero, they can have 40% of the remaining amount of the credit (up to $1,000) refunded.

The Lifetime Learning Credit (LLC) provides a credit of up to $2,000 per tax return. Unlike the AOTC, the LLC is not limited to the first four years of postsecondary education and can be used for undergraduate, graduate, and professional degree courses. There is no limit to the number of years the LLC can be claimed. The credit is calculated as 20% of the first $10,000 in qualified education expenses.

For 2024 and 2025, both credits have income limitations. The AOTC and LLC are available to individuals with a modified adjusted gross income (MAGI) of $80,000 or less, or $160,000 or less for those filing jointly. The credits are phased out for incomes between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint filers. A taxpayer cannot claim both the AOTC and the LLC for the same student in the same year.

Available Education Tax Deductions

A deduction is available for individuals repaying student loans. The Student Loan Interest Deduction allows taxpayers to deduct up to $2,500 in interest paid on student loans during the year. This is an “above-the-line” deduction, meaning it can be claimed even if the taxpayer does not itemize deductions. The loan must have been taken out solely to pay for qualified education expenses.

Eligibility for the deduction is subject to income limitations. For 2024, the deduction is gradually reduced for single filers with a modified adjusted gross income (MAGI) between $80,000 and $95,000, and between $165,000 and $195,000 for those married filing jointly. If your MAGI exceeds these upper limits, you cannot claim the deduction.

The Tuition and Fees Deduction expired at the end of 2020 and cannot be claimed for the current tax year. This deduction had allowed taxpayers to reduce their taxable income by up to $4,000 for qualified tuition and fees. Awareness of its expiration can prevent confusion.

Determining Who Can Claim the Benefits

A common point of confusion is who gets to claim education tax benefits: the student or the parent. The deciding factor is whether the student qualifies as a dependent on someone else’s tax return. If a parent is eligible to claim the student as a dependent, then only the parent can claim education credits like the AOTC or LLC. This rule applies regardless of who actually paid the tuition.

Expenses paid by the student or a third party, such as a grandparent, are treated as if they were paid by the parent claiming the dependent. For example, if a grandparent pays a student’s tuition directly to the university, the IRS considers this a gift to the parent, who is then deemed to have paid the expense. The grandparent cannot claim the credit.

If a student can be claimed as a dependent by a parent, the student cannot claim an education credit for themselves. This holds true even if the parent ultimately decides not to claim the student as a dependent on their tax return. For a student to claim the credit, they must not be eligible to be claimed as a dependent by anyone else.

To be claimed as a “qualifying child” dependent, a student must be under age 24 at the end of the year, be a full-time student for at least part of five calendar months, and not provide more than half of their own financial support. If these dependency tests are met, the right to claim education credits rests with the parent.

Information and Forms for Claiming Benefits

To claim education tax breaks, specific documentation is required. The primary document from the educational institution is Form 1098-T, Tuition Statement. Colleges and universities issue this form to students who paid qualified tuition and related expenses. Box 1 of the form shows the total payments received for these expenses.

Qualified education expenses include tuition and fees required for enrollment. For the AOTC, qualified expenses also extend to course materials like books and supplies, even if not purchased directly from the school. You should keep detailed records and receipts for all expenses, as the Form 1098-T may not capture all qualifying costs.

For those repaying student loans, Form 1098-E, Student Loan Interest Statement, is the document needed. Lenders are required to send this form to any individual who paid $600 or more in interest during the year. The form reports the total amount of interest paid.

How to Claim Education Tax Breaks

The IRS form for claiming education credits is Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). To complete this form, you will need the student’s name and Social Security Number, the institution’s information from Form 1098-T, and the total amount of adjusted qualified education expenses. The total credits are then entered on Schedule 3 (Form 1040). The refundable portion of the AOTC is entered directly on Form 1040.

The student loan interest deduction is claimed using the interest amount from Form 1098-E. The total deductible amount, up to the $2,500 limit, is reported on Schedule 1 (Form 1040). This adjustment reduces your total income to arrive at your adjusted gross income.

For individuals using tax preparation software, these steps are largely automated. The software will populate the correct lines on the appropriate forms and schedules after you input the data from your 1098-T, 1098-E, and records of other qualified expenses.