Since my senior year in high school, I’ve been aware of how expensive college can be. That’s one of the reasons I attended community college first. But nothing prepared me for how much it would cost to pay for my bachelor’s in criminology and criminal justice degree. (I also have a certificate in counterterrorism!)
I’m proud of finally finishing school, but I’m not proud about adding another $22,000 to the student loan debt incurred during my associate’s. Fortunately, benefiting from tax breaks for my education helped me stretch my budget further — even if it didn’t remove the sting altogether.
Is college tuition tax-deductible?
Technically, not anymore — at least as a default option. But there are exceptions that allow some people, like self-employed workers, to deduct some college expenses. And student loan interest remains tax-deductible.
The IRS also provides tax credits to help reduce the final cost of higher education.
What happened to the college tuition tax deduction?
There used to be a Tuition and Fees Deduction, which allowed people to deduct up to $4,000 in higher education expenses. That particular tax break no longer exists as of 2021.
But students — and parents paying for college — can take advantage of the currently available deductions and tax credits. “I find that most people don’t even consider the tax cost of college,” says Jack Wang, a wealth advisor who helps others at Innovative Wealth Management.
What tax breaks are currently available to cover college costs?
You can reap the tax benefits of paying for higher education in three different ways:
- Tax deductions
- Tax credits
- Tax-advantaged savings plans
Since each has its own considerations, we’ll break them down below
Tax deductions for higher education
Deductions are tax breaks that reduce the amount of income you get taxed on. They’re a great way to maximize any money that’s spent out of pocket. If your income is $40,000, for example, and you qualify for tax deductions worth $5,000, you’ll only get taxed on $35,000.
Tax deductions are different from tax credits, which directly reduce the amount you owe or — in some cases — increase your tax refund. It is possible to be eligible for both deductions and credits for your tuition and other costs, so keep that in mind!
Deducting work-related education as a self-employed person
The IRS lets you deduct work-related educational expenses from your self-employment income, ultimately lowering the amount you pay in income and self-employment taxes. This is true even if your business is a side hustle and most of your income comes from a day job.
So get out the Keeper app, which automatically finds work-related write-offs for you! Let the app know you’re going to school to improve your job skills, and it’ll help you claim all your related expenses.
If you do your taxes by hand, you can write off work-related education expenses using box 27a of your Schedule C.
What kind of educational expenses can self-employed people deduct?
Deduct anything that helps you maintain your gigs or charge more in your current field. That includes, but isn’t limited to:
- Certifications like CPR or a food handlers card
- Classes for a license needed to perfume job duties like childcare
- Online programs to learn job skills like Google Ads
Note: When it comes to work-related education, the IRS lets you deduct lots of expenses other than tuition. Eligible costs related to attending school include:
- Class supplies
So alongside day-to-day business expenses like software, web hosting, and work supplies, keep an eye out for what it costs you to up your skills.
Deducting work-related education as an employee
Most W-2 employees can’t deduct work expenses, including education. But there are exceptions if you’re:
- An Armed Forces reservist
- A qualified performing artist
- A fee-based state or local government official
- Disabled, with educational expenses stemming from your disability
If that’s you, you can deduct a class that either helps you maintain or improve your job skills or is required to do your job. That goes whether it’s the law or your employer making it a requirement.
As long as you qualify, you can deduct these expenses using line 4 of Form 2106, for “Employee Business Expenses.”
Deducting student loan interest
Suppose you’ve already graduated, and you’re now paying off student loan debt. You can get a deduction for the interest you’ve paid during the tax year.
Who can deduct student loan interest?
You can take advantage of the student loan interest deduction as long as your modified adjusted gross income (MAGI) Is:
- Under $80,000 if you file separately
- Under $160,000 if you file jointly if your spouse
How much student loan interest can you deduct?
The maximum deduction is $2,500 out of the student loan interest you’ve paid per year.
How do you deduct student loan interest?
You can deduct student loan interest on line 21 of your Schedule 1.
Tax credits for college education
Unlike deductions, credits directly reduce the amount of money you owe. If you get a tax credit worth $1,000, that’s $1,000 off your tax bill. In some cases, credits can also get you a tax refund. (These are called “refundable” credits.)
While the deductions above are great ways to minimize your taxable income, credits can get you a significant chunk of money to use toward upcoming expenses.
Two tax credits can be claimed for education expenses:
- The Lifetime Learning Credit (nonrefundable)
- The American Opportunity Tax Credit (partially refundable)
You must choose between these two credits for the year – you can’t claim both in the same year.
File with Keeper, and we can automatically fill out your Form 8863 for you.
Lifetime Learning Credit
The Lifetime Learning Tax Credit is for tuition and related expenses (meaning, enrollment fees) at an eligible educational institution. That can include colleges, universities, trade schools, and other post-secondary programs that are accredited. If you’re not sure if your school is eligible, look it up in the Database of Accredited Postsecondary Institutions and Programs.
What makes this credit especially appealing is that you don’t need to be enrolled in a traditional degree or certificate program. You can also claim classes you’ve taken to stay employed or improve your job performance. So those classes you’re taking to learn social media to help your business grow? This is the one.
How much is the Lifetime Learning Credit worth?
You can claim up to $2,000. This credit is not refundable.
How many times can you claim the LLC?
As many times as you qualify. There’s no limit.
What are the requirements for the LLC?
You can claim the credit if:
- You, your guardian (if you’re a dependent) or the third party supporting your education (for example, an employer) has paid for qualifying education expenses at an eligible institution during the tax year
- The person receiving an education is you, your spouse, or your dependent
- Your MAGI is under $90,000 if you’re a single filer and under $180,000 if you’re a joint filer
Note: If your income is between $80,000 and $90,00 as a single filer or between $160,00 and $180,000 as a joint filer, the amount of the credit you can claim will be lower than someone with less income.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) can be claimed to help cover qualified education expenses that you’ve incurred over the tax year. That means your tuition, fees, and course materials, such as textbooks and lab supplies.
How much is the American Opportunity Tax Credit worth?
It’s worth up to $2,500, and it’s partially refundable. You can pocket up to 40% of your credit amount as a tax refund — a max of $1,000.
How many times can you claim the AOTC?
You can claim this credit up to four times.
What are the requirements for the AOTC?
To claim this credit, you must:
- Have a modified adjusted gross income of $80,000 or less if you’re a single filer or $160,000 or less if you’re married and filing jointly
- Be pursuing a degree or other recognized education credential, such as a certificate
- Be enrolled part-time or more for at least one academic period at the beginning of the tax year
- Not have a felony drug conviction for the tax year
- Not have finished your first four years of higher education by the beginning of the tax year filed
- Not have claimed the Lifetime Learning Credit for the same tax year
If you decide to claim an AOTC, keep records for the college expenses that qualify.
Tax-advantaged savings plans you can use for college
Suppose you’re still attending school or looking to go back to further your education. There are some investment accounts that will give you tax advantages when it comes time to pay for your classes.
A 529 is an investment account that allows you to invest or save for tuition and other expenses that must be covered when attending school. These are best known as tax-advantaged savings plans that parents (and grandparents) can use to save for a child’s education. But they’re also available for you to use to fund your own education as an adult.
What tax advantages do 529 plans offer when they’re used to pay for college?
Unlike with other investment accounts, you don’t have to pay taxes on earnings or withdrawals, as long as they're used for qualifying educational expenses.
That makes 529s appealing from a tax perspective, even though you can’t save for a 529 with pre-tax dollars — meaning, paying money into one won’t shield your income from being taxed at the federal level.
And while you can’t claim a tax deduction federally, most states do offer a state tax deduction when saving a 529.
How much can you contribute to a 529 plan?
All states have different stipulations, so be sure to check the limit for the state where you want to open one. These limits are in the low- to mid-six figures, and they range from $235,000 (in Georgia and Mississippi) to $550,000 (in Missouri).
Traditional and Roth IRAs
An Individual Retirement Account (IRA) is an investment account usually used to fund retirement. But it can also help cover college costs.
What tax advantages do IRAs offer when they’re used to pay for college?
Since an IRA is funded with money you’ve already paid tax on, you can withdraw the contributions at any time without penalty. Usually, anything the account earned — as opposed to you putting it in — can’t be removed without penalty until age 59.5. So if your $5,000 contribution has made you $2,000, you can only withdraw the $5,000 without taking a hit. However, there are exceptions to this rule known as “qualified distributions.”
One such qualified distribution is withdrawing up to $10,000 to cover higher education. The costs this can cover include:
- Room and board if enrolled at least half-time of that academic period.
What else to consider when claiming tax breaks for college
Claiming educational deductions and tax credits is a great way to subsidize the ever-growing cost of higher education. However, you should still think about a few things before getting started.
Consider whether college is the only option
Think through the possibility that someone won’t attend college. “Whatever strategies families use should balance tax benefits, potential financial aid, as well as the desire for flexibility in case the student doesn’t attend college or the family has other financial goals,” said Jack Wang, the wealth advisor.
That’s especially true since up to 40% of students seeking higher education drop out before graduating.
Balance tax breaks against possible financial aid awards
Wang recommends thinking about the greater financial good when it comes to tax breaks. In some cases, maximizing education-related tax benefits can lead to less financial aid.
“While financial aid is primarily based on the tax return, there are also major differences between financial aid and taxes,” he said. “What can be good for taxes can hurt financial aid, and vice versa.”
Make sure you know who’s claiming the deductions and credits
A situation where multiple people try to claim the same credits or deductions for a single student may invite scrutiny. “If you’re claiming a student or even filing for yourself, any discrepancies will send an alert to the IRS,” said Atiya S Brown, CPA, CA from The Savvy Accountant.
This might happen if, for example, two divorced parents claim the same student as a dependent, or if a student claims the AOTC without knowing they’re being claimed as a dependent on a parent’s return.
If you’re a student who’s currently a dependent, always check with the guardian whose financial records you used for your FASFA application.
Most e-filing software, like Keeper, will catch any such discrepancies before your return is sent to the IRS, using the Social Security number on your return. But what about paper filers?
“If you or another party should file a return on paper, the government will still catch it through their matching system,” said Brown.
Higher education is expensive, but it doesn’t have to be unattainable. Claiming the proper education deductions and tax credits can help you get the degree of your dreams for a fraction of the price.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email email@example.com with your questions.