Can You Deduct College Tuition On Your Federal Income Tax Return? There are several options for deducting college tuition and textbooks on your federal income tax return, including the American Opportunity Tax Credit, Lifetime Learning Tax Credit, Tuition and Fees Deduction, and Employer-Paid Educational Assistance, as well as tax-free distributions from a college savings plan.
There is no double-dipping. Each dollar of qualified expenses can be used to justify only one tuition tax break. There are also coordination restrictions that prevent taxpayers from claiming both the American Opportunity Tax Credit and Lifetime Learning Tax Credit for the same student, even if the qualified expenses do not overlap.
The American Opportunity Tax Credit is the best of the tuition tax breaks. It is worth more per dollar of qualified expenses than any other tuition tax break, even a tax-free distribution from a 529 college savings plan. Generally, taxpayers should claim the American Opportunity Tax Credit first, unless they want to preserve its availability for future tuition expenses.
All of these tax breaks can be claimed even if the taxpayer does not itemize.
College tuition may be eligible for a tax deduction or tax credit on your federal income tax return.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a partially-refundable tax credit worth up to $2,500 per student per year. The AOTC covers 100% of the first $2,000 in tuition, fees and course materials (textbooks, supplies and equipment) per student and 25% of the second $2,000. The tax credit is 40% refundable (up to $1,000) if the taxpayer cannot be claimed as a dependent on someone else’s income tax return.
Qualified expenses do not include nonacademic fees, such as student activity fees, athletic fees and insurance.
The tax credit is limited to the four years of postsecondary education and to four tax years per student. Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.
The AOTC is subject to the following eligibility restrictions: The student must be the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents. The student must be seeking a degree or certificate at a college or university that is eligible for Title IV federal student aid. The student is ineligible if they are participating in a dual enrollment program. The student must be enrolled on at least a half-time basis. The student is ineligible if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance.
The AOTC is not subject to the Alternative Minimum Tax (AMT). The income phase outs are $80,000 to $90,000 (single) and $160,000 to $180,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation. About 7.4 million taxpayers (4.8%) claimed the American Opportunity Tax Credit in 2018.
Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit (LLTC) is a non-refundable tax credit worth up to $2,000 per taxpayer. The LLTC covers 20% of the first $10,000 in tuition and required fees.
Qualified expenses may include nonacademic fees, such as student activity fees and athletic fees, but only if they must be paid directly to the college as a condition for enrollment or attendance. Qualified expenses are limited to courses of instruction to “acquire or improve job skills.”
Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.
The tax credit can be claimed for an unlimited number of years.
The LLTC is subject to the following eligibility restrictions: The student is not required to be seeking a degree or certificate, so the tax credit can be used for continuing education. The student must be enrolled at a college or university that is eligible for Title IV federal student aid. The student can be enrolled on a part-time basis. The student is eligible even if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance. The Lifetime Learning Tax Credit is often claimed by graduate or professional school students who are no longer eligible for the American Opportunity Tax Credit. The income phase outs in 2021 are $59,000 to $69,000 (single) and $119,000 to $139,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible.
The income phase outs are adjusted annually for inflation.
About 2.8 million taxpayers (1.8%) claimed the Lifetime Learning Tax Credit in 2018.
Tuition and Fees Deduction
The Tuition and Fees Deduction is an above-the-line exclusion from income for up to $4,000 in tuition and fees. The deduction is reduced to $2,000 for taxpayers with income within the income phase out ranges. Course material costs can also qualify if paid directly to the college and if they are required for enrollment or attendance. Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.
The tuition and fees deduction can be claimed for an unlimited number of years.
The Tuition and Fees Deduction is subject to the following eligibility restrictions: The student is not required to be seeking a degree or certificate. The student must be enrolled at a college or university that is eligible for Title IV federal student aid. The student can be enrolled on a part-time basis. The student is eligible even if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance. The income phase outs are $65,000 to $80,000 (single) and $130,000 to $160,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation.
Employer-Paid Educational Assistance
Up to $5,250 in employer-paid educational assistance can be excluded from income. Qualified expenses include tuition and fees, books, supplies and equipment. This tax benefit is available for an unlimited number of years. The student must be the employee, not the employee’s spouse or dependents. The employee does not need to be seeking a degree or certificate. There are no income phase outs.
Tuition Gift-Tax Exclusion
Tuition paid directly to an educational institution is not subject to gift taxes. However, direct payments of tuition may reduce the student’s eligibility for need-based financial aid. This tax break can be claimed for an unlimited number of years. There are no income phase outs.
Qualified Scholarships
Scholarships, grants and fellowships that are used to pay for tuition, fees and course materials (books, supplies and equipment) are excluded from income if the student is seeking a degree or certificate. Tuition waivers are also eligible. The money must not be a fee for services provided by the student, with a few exceptions, such as teaching and research assistantships. There are no income phase outs.
Education Savings Bond Program
Interest on Series EE bonds issued in 1990 or a later year and all Series I bonds is excluded from income if it is used to pay for tuition and fees, or rolled over into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account. The income phase outs in 2021 are $83,200 to $98,200 (single) and $124,800 to $154,800 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are adjusted annually for inflation.
529 College Savings Plans and Prepaid Tuition Plans
The earnings portion of a qualified distribution from a 529 college savings plan or prepaid tuition plan is tax-free. Qualified expenses include tuition and fees, books, supplies and equipment, and expenses for special needs services. Room and board is a qualified expense if the student is enrolled at least half-time. Qualified expenses may include up to $10,000 each in student loan payments for the beneficiary and the beneficiary’s siblings. 529 plan contributions may also be eligible for a state income tax deduction or tax credit. In most states contributions are eligible for the state income tax break even if you immediately tax a distribution to pay for qualified expenses. This effectively provides a discount on college tuition and other qualified expenses. There are no income phase outs.
Coverdell Education Savings Accounts
The earnings portion of a qualified distribution from a Coverdell education savings account is tax-free. Qualified education expenses include tuition, fees, books, supplies and equipment. Room and board is a qualified expense if the student is enrolled at least half-time. There is an income phase-out on contributions, but not distributions. The income phase outs are $95,000 to $110,000 (single) and $190,000 to $220,000 (joint). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation.