Tax Benefits for Attending College

Did you know that the Internal Revenue Service (IRS) provides tax benefits for education?

The tax benefits can be used to get back some of the money you spend on tuition or loan interest or to maximize your college savings. 

Even if you normally wouldn’t file a tax return because of your income level, be sure to do so! If you don’t, you could miss out on tax credits that would put money in your pocket.

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

• A tax credit reduces the amount of income tax you may have to pay.

• A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.

• Certain savings plans allow the accumulated earnings to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.

• An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 

Tax Credits for Higher Education Expenses

Two tax credits help offset the costs (tuition, fees, books, supplies, equipment) of college or career school by reducing the amount of your income tax:

• The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential.
• The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required for the course and had to be purchased from the school.

Student Loan Interest Deduction

You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.

Read IRS Publication 970, Tax Benefits for Education to see which federal income tax benefits might apply to your situation.