Do you have or will soon have children heading off to college? If so, you may want to review information from the Internal Revenue Service (IRS) regarding college education expenses. For example, the IRS offers income tax deductions and education credits for college tuition and other education expenses. In addition, special higher education savings plans allow interest to grow free of income tax.
These income tax deductions, education credits and savings plans for college education expenses are subject to limitations. Below you’ll find a summary of these benefits. At the end of the article, you’ll find links to more information.
Tax deductions can help taxpayers offset the cost of higher education. Use these education deductions to reduce the amount income tax you have to pay. This leaves a little more money for college expenses.
- Tuition and Fees Deductions. Deductions for qualified higher education expenses can reduce the amount of your taxable income by up to $4,000.
- Student Loan Interest Deduction. If you have a college loan, the interest paid may qualify you for a deduction. It can reduce your taxable income by up to $2,500.
Income tax education credits
Instead of tax deductions, you may be able to take one of the following higher education credits. Choose the credit that gives you the most income tax benefit.
- American Opportunity Credit. This credit is available for the first four years of post-secondary education. Qualified expenses include tuition, fees, course-related books, supplies, and equipment. The maximum annual income tax credit is $2,500 per student.
- Lifetime Learning Credit. This credit is available for any number of years for qualified expenses. You may be able to claim a lifetime learning income tax credit of up to $2,000. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, only one type of education credit per student may be claimed in the same tax year. Therefore, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course, or those who are not pursuing a degree at this time.
If you pay college expenses for more than one student in the same year, you may be able to use credits for both. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for a second student. So, you can choose to take income tax credits on a per-student, per-year basis.
Special savings plans
- 529 savings plans. These special savings plans allow taxpayers to either prepay higher education expenses, or contribute to an account that will be used for eligible expenses. 529 plans are a popular way for parents and other family members to save for a child’s college education. Note that contributions to 529 plans are not tax-deductible. However, the interest the account earns isn’t subject to federal tax. But this tax benefit only applies if the savings is used toward eligible education expenses.
For more information or to determine whether these tax benefits apply to you, visit Tax Benefits for Education at IRS.gov and download Publication 970. Or, contact your local IRS office or a certified tax advisor.