Navigating Tax Benefits for Higher Education
Please note that this article provides general information only and should not be relied on as official tax advice.
Unless you’re fortunate enough to have your college or technical school fully covered by scholarships or other financial aid, you or your parents may at least be able to take advantage of tax credits to help offset a portion of the cost. You should receive a Form 1098-T each year for qualifying tuition payments from your school, but keeping good records of your education expenses is important as the 1098-T doesn’t necessarily include 100% of the costs that qualify for the credits. Below is a description of the potential tax credits. If you have a 529 College Savings Plan available be sure to read the discussion on using those funds further below. All information is sourced from IRS Publication 970 (Tax Benefits for Education) unless otherwise noted:
American Opportunity Credit (AOTC)
The American Opportunity Credit is available to help offset the costs during the first four years of education. This credit is claimed by the person claiming the student as a dependent, or by the student if they are not claimed as a dependent by anyone else. If the taxpayer who qualifies to claim the student as a dependent is ineligible to claim the AOTC on their return due to their income being over the limit, they can elect not to claim the student as a dependent so that the student can claim the credit.
This credit is available to students who have not completed more than four years of postsecondary education and can be claimed for a maximum of four tax years for each student.
Students cannot have any felony convictions for drug related offenses.
Students who do not qualify for the AOTC may qualify for the LLC.
Qualifying expenses include:
Tuition and fees
Required course materials, such as books and lab supplies
The credit is:
100% of the first $2,000 of expenses
25% of the next $2,000 of expenses
The maximum credit is $2,500 ($4,000 in expenses)
40% of the credit is refundable, meaning that is it available without having any tax liability to offset
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is available to students in all years of postsecondary education (including students with felony drug convictions), as well as for courses to acquire or improve job skills
Qualifying expenses include tuition and fees, along with required course materials that must be purchased directly from the educational institution.
The credit is a non-refundable credit of 20% of the qualified education expenses, up to $10,000 in expenses (maximum credit of $2,000)
Qualified Tuition Program (QTP) / 529 Plans
If your parents or grandparents set up a 529 savings plan for you, it’s important to understand how these funds can be used, and how they can impact the tax credits discussed above.
Expenses that can be paid from a 529 plan include:
Tuition and fees
Books, supplies and equipment
Room and board
Computer equipment and software
Principal and interest on qualifying student loans (up to $10,000)
Use of 529 plan funds to pay for costs eligible for the tuition credits discussed above can result in tax penalties. Consulting with a tax advisor in advance of using 529 funds may be beneficial to avoid any tax traps.
Beginning in 2024, beneficiaries of 529 plans will also have the option to rollover their plans into a Roth IRA. This ensures that any money put into these plans that the beneficiary doesn’t use for education can be used to start their retirement accounts. More information about this new option can be found here .
If you would like assistance with tax planning for college education, please contact us to schedule an appointment!
The information provided in this article is not all-encompassing. For more details about these benefits along with restrictions on claiming these credits, please refer to IRS Publication 970 .
