Is College Tuition Tax Deductible?

Going to college is a huge step for both the student and their families, but it seems to get more expensive every year.  As college tuition continues to increase, getting an education can seem like a huge financial burden.  Although there’s not much you can do about the increases in college tuition, the Internal Revenue Service (IRS) offers several tax-saving opportunities that could help alleviate the financial cost of college for qualifying college students and guardians.

Let’s dive into everything you need to know about what education expenses are tax deductible and credits.

The Tuition and Fees Deduction

After you calculate your 1099 tax rate, you will be relieved to uncover that eligible taxpayers can deduct up to $4,000 in qualified tuition or higher education expenses for themselves, a spouse, and dependent children as an above-the-line deduction.  

Qualified higher education expenses generally include tuition and fees, textbooks, equipment, and supplies that are needed at an institution.  

Costs for room and board, transportation, insurance, student health fees, or other personal living expenses are not eligible for the deduction.  The Tuition and Fees Deduction came to an end in 2017 but the expiration date has been extended to December 31, 2020.

Taxpayers must meet the following conditions to be qualified for the Tuition and Fees Deduction for the 2019 and 2020 tax years.  The conditions differ between the amount of income a household makes.

  • If joint filers’ modified adjusted gross income (MAGI) is $65,000 or less ($130,000 if married filing jointly), the maximum $4,000 deduction can be claimed.  
  • If taxpayers’ modified adjusted gross income is between $65,001 and $80,000 ($140,001 and $160,000 if married filing a joint return), the maximum $2,000 deduction can be claimed.  
  • If taxpayers’ modified adjusted gross income is above $80,000 as a single filer ($160,000 if married couples filing jointly), nothing can be claimed.  

The Tuition and Fees Deduction is available for both full-time and part-time students at all levels of post-secondary education.

A IRS Form 1098-T is typically sent to students by January 31 in the following tax year.  This form is then used to complete Form 8917 to claim the Tuition and Fees Deduction for 2019 and 2020 year.  If taxpayers didn’t claim the deduction for 2018 year, they can file amended returns and retroactively claim the deduction. Taxpayers won’t be able to claim the Tuition and Fees Deductions for 2021 year unless the extension for the expiration date is given.

Higher education expenses exclude any tax-free educational benefit, such an s-scholarship, employer-provided educational assistance, and veteran’s educational assistance received during the year. Even student loan interest is tax deductible.

Taxpayers who take qualified funds from their 529 college savings plan to pay for college costs can still claim the Tuition and Fees Deduction. However, the expenses must be paid using other funds than the distributions from a 529 college savings plan.    

Married couples who file separately cannot claim the Tuition and Fees Deduction.  

Tax Credits for College Expenses

There are two tax credits available to help students and their parents or guardians offset the costs of higher education.

The American Opportunity Tax Credit is worth up to $2,500 per eligible student. This credit is only available for students’ first four years of higher education.  Qualified education expenses that are covered are similar to the Tuition and Fees Deduction.  

To be eligible for the full credit, the modified adjusted gross income must be less than $80,000 as a single filer ($160,000 if married filing jointly). The credit that can be claimed begins to phase out when the modified adjusted gross income is between $80,001 ($160,001 if married filing jointly) and $90,000 ($180,000 if married filing jointly).  Over those amounts, nothing can be claimed.  

The American Opportunity Tax Credit is partially refundable – up to 40% of this credit, for a maximum federal income tax refund of $1,000.

Same here, the student must have an enrollment of at least half time for at least one academic period.  Additionally, the deduction is only applied to related expenses paid for the current year’s academic period or an academic period that starts within the first three months of the following year.  

Lastly, this credit cannot be claimed if married filing separately tax returns are filed.  

The Lifetime Learning Tax Credit

The Lifetime Learning Credit is worth up to $2,000 and allows a tax credit at any eligible educational institution.  Although this credit is a nonrefundable tax credit, this credit is super helpful because the credit can be indefinitely claimed, and the student doesn’t need to be pursuing a degree program or other recognized education credential.  Also, a student doesn’t have to be enrolled at least half-time to qualify.

To obtain the full $2,000 lifetime Learning Credit, taxpayers’ modified adjusted gross income can’t be higher than $56,000 as a single filer ($112,000 if you’re married filing jointly). The credit starts to phase out if the MAGI is between 56,001 ($112,001 if married filing jointly) and $68,000 ($136,000 if married filing jointly).  You cannot claim the credit if your MAGI is $68,000 or more ($136,000 and more if married filing jointly).  

Again, if your filing status is married filing separately, this credit cannot be claimed.  

You cannot claim both the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student and for the same year. You cannot also claim these credits in conjunction with the Tuitions and Fees Deduction.  In other words, you basically have two options – claim one of the two education credits, or the Tuition and Fees Deduction. Which is best for you?

In general, credits are more valuable and powerful than deductions as credits reduce your tax liability dollar for dollar, and deductions, on the other hand, are subtracted from your taxable income. However, the Tuition and Fees Deduction can be more useful when taxpayers’ income is higher than the income ceilings of the two education tax credits. Therefore, to find the best choice for you, you need to consider all conditions that apply to each option and how each option works.

Summary

Likewise, there are three generous tax breaks for college costs – Tuition and Fees Deduction, American Opportunity Tax Credit, and Lifetime Learning Credit.  Though two tax credits are more tax-saving as they offset your tax bill dollar-for-dollar compared to a tax deduction that only reduces the taxable income that’s subject to tax, there can be various situations where you might benefit from the Tuition and Fees Deduction the most.  You need to be very careful to decide which option is the best for you.      

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Soo Lee

Soo Lee

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Soo has extensive experience in publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diversified industries including manufacturing, wholesale/retail businesses, construction, real estate development and investment, banking, finance and professional/legal consulting service. Soo earned her B.B.A. in Accounting from Ohio State University and Master of Taxation from Georgia State University. Soo is a Certified Public Accountant in Georgia and a member of the American Institute of Certified Public Accountants.

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Note: at Keeper Tax, we're on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please reach out via email if you have questions.