What College Expenses Are Tax-Deductible for Parents—Answered (2024)

The cost of college education keeps rising, making it an expensive venture for parents planning to send their children to college. Despite saving for years, some families struggle to cover all college costs for their children. Luckily, you can use some college expenses to get tax breaks for the period your child is in college. This guide will explain what college expenses are tax-deductible for parents and what you need to qualify for the deductions.

What College Expenses Are Tax-Deductible?

Federal tax breaks allow students and parents to claim tax credits or tax deductions on some college expenses. This helps offset part of the college costs, making higher education more affordable. College deductions for parents significantly reduce the burden by lowering their tax liability.

Student loan interest is one of the tax-deductible college expenses. You or your child may qualify for a student loan interest deduction if:

• You are a taxpayer
• Your child is enrolled at least half-time in an eligible institution

This deduction allows you to subtract up to $2,500 of the interest you paid on qualified student loans from your taxable income.

Tax deductions are different from tax credits—tax credits directly reduce the amount you owe, while tax deductions reduce the amount of tax you need to pay. Lowering your tax liability with tax deductions also reduces your adjusted gross income, which could give you access to other tax deductions and credits.

However, not all expenses can be deducted this way—for example, work-related costs don’t apply. Previously, you could claim tax deductions if the education was required by law or an employer. Due to changes to itemized deductions with tax reform, this deduction is no longer available for employees from 2018–2025.

Is College Tuition Tax-Deductible for Parents?

College tuition is no longer directly tax-deductible for parents in the U.S. as of the 2021 tax year. Before the Fees and Tuition Deduction was repealed, taxpayers could deduct up to $4,000 higher education expenses. You can still get tax breaks on tuition, though, as there are some alternatives you can claim to help your dependent child with qualified education expenses.

The currently available tax breaks to help you cover your child’s college expenses are:

1. College tax credits for parents
2. Tax-advantaged savings plans

College Tax Credits for Parents

Tax credits directly reduce your tax bill, and you can sometimes use them to get a tax refund. Unlike deductions that reduce your taxable income, tax credits can get you a good amount of money to use for your child’s college expenses. There are two tax credits you can claim for educational expenses:

1. The Lifetime Learning Credit (LLC)
2. The American Opportunity Tax Credit (AOTC)

Both are available to students and parents and can be claimed through Form 8863 using the information you’ll find on Form 1098-T, which you should receive from the eligible educational institution. You can only claim one of these tax credits within the same tax year.

The Lifetime Learning Credit (LLC)

The lifetime learning credit (LLC) lets taxpayers claim 20% of tuition and mandatory fees paid, up to a total tax credit of $2,000 per year. The LLC is a better option if your child doesn’t qualify for the AOTC or is taking a graduate or professional course.

The only eligible expenses for LLC are tuition and fees. You can claim this tax credit however many times you wish as long as your child is pursuing a recognized educational credential at an eligible educational institution.

To qualify for an LLC, you need to be within the education credit income limits. If your modified adjusted gross income (MAGI) is below $80,000 for single filers or $160,000 for married filing jointly, you’re eligible for the full LLC amount of up to $2,000. The credit amount gradually decreases as your MAGI approaches the phase-out limit.

If your MAGI is between $80,000 and $90,000 for single filers or $160,000 and $180,000 when filing jointly, you’ll get a reduced amount. If your MAGI is over $90,000 or $180,000 if you file a joint return, you can’t claim the credit.

The American Opportunity Tax Credit (AOTC)

You can claim the American opportunity tax credit (AOTC) on 100% of the first $2,000 of your child’s college tuition and expenses and 25% of the next $2,000 in tuition and related expenses, up to a maximum of $2,500 per year.

The eligible expenses include:

• Qualified tuition and fees
• Course materials (such as books and supplies)
• Required fees

To qualify for AOTC, your child must:

• Be pursuing a degree or recognized education credential
• Be enrolled at least half-time for at least one semester during the tax year
• Not have finished four years of higher education at the tax year’s start
• Not have claimed AOTC or Hope credit for more than four tax years
• Not have a felony drug conviction at the tax year’s end

Eligible taxpayers can get a refund of up to 40% of the credit amount, or a maximum of $1,000, which can be refunded to you even if you don’t owe any taxes.

To qualify for full credit, your MAGI must be $80,000 or less ($160,000 or less if you’re filing jointly). You’ll receive a reduced amount if your MAGI is between $80,000 and $90,000 for single filers or $160,000–$180,000 when filing jointly. If your MAGI is over $90,000 or $180,000 for joint filers, you can’t claim any credit. The AOTC is a better option if your child is in their first four years of undergraduate education as it’s worth more money and can be refunded.

Tax-Advantaged Savings Plans

Tax-advantaged savings plans like the 529 plan provide tax breaks for parents of college students. These plans let you save money with significant tax benefits, typically in the form of tax-free growth and tax-free withdrawals for specific qualified expenses, such as:

• Tuition
• Fees
• Books
• Supplies
• Room and board

Each state offers its own 529 plan, and while you can contribute to any plan nationwide, you may receive additional tax benefits by using your own state’s plan. To maximize your benefits with the 529 plan, start saving early. This will give you more time to grow your investment.

Coverdell education savings account (ESA) is another tax-advantaged savings plan administered by the IRS but offered through financial institutions. Like the 529 plan, it grows your earnings tax-free if you use them for qualified education expenses.

Qualified expenses include tuition, fees, books, and other approved expenses at eligible educational institutions. However, state tax treatment may vary. The annual contribution limit is $2,000 per beneficiary, with income phase-outs for higher earners. Unlike 529 plans, Coverdell ESA funds can be used for K-12 and higher education expenses, which is beneficial if you have younger children.

Understanding what counts as qualified tuition and related expenses helps you accurately claim tax credits and maximize the tax benefits from your child’s education expenses.

These expenses must be paid for a qualified student enrolled at least half-time in an eligible educational institution, including colleges, universities, and trade schools. They’re paid during the academic period starting in your tax year or the first three months of the following year. The qualified expenses under the AOTC or LLC include:

The following expenses don’t qualify for the AOTC or the LLC:

• Room and board
• Medical expenses
• Transportation
• Insurance
• The same expenses paid with tax-free educational assistance
• The same expenses used for any other tax deduction, credit, or educational benefit
• Student fees, unless required as a condition for enrollment or attendance

How Education Tax Credits Work

If you paid for your child’s college in the previous tax year and you meet the income limits, you can claim credits to reduce the income taxes you must pay. However, if your filing status is married filing separately, you’re not eligible to claim any education credits. If your college-going child isn’t dependent on someone else’s return, they can claim the credits themselves.

Tax credits can’t be double-dipped—you and your child can’t claim the same credit for the same year, and you can’t claim both education credits for one student. You also can’t claim tax credits for expenses covered by scholarships, grants, or fellowships unless they exceed your total qualified expenses.

How To Maximize Education Tax Credit for Parents With College Students

The following tips can help you get the most out of the available tax breaks:

1. Make scholarships taxable to maximize AOTC
2. Include tax-free ESA or 529 expenses in income to maximize credits
3. Prepay tuition for the spring academic period

Make Scholarships Taxable To Maximize AOTC

If your child has an unrestricted scholarship or grant (like the Pell Grant) and isn’t getting the maximum AOTC, consider recharacterizing part of the award as taxable income. You can use unrestricted funds for any educational expenses, even non-qualified ones. By making some of these taxable, you’ll increase the “qualified education expenses” for the AOTC calculation.

This strategy can boost the AOTC more than the extra tax you pay on the reclassified income. However, you should only recharacterize enough to reach the maximum AOTC without unnecessary tax burden.

Include Tax-Free ESA or 529 Expenses in Income To Maximize Credits

Claiming an education credit for expenses already covered by a tax-free Coverdell ESA or 529 plan distribution can be tricky. You’ll owe taxes on the earnings portion of the distribution used for the credit. The increase in education credit typically outweighs the additional tax burden, though, making it a smart financial move overall.

Prepay Tuition for the Spring Academic Period

Prepaying tuition and fees for the spring academic period before December 31 can be a game-changer. This is because payments made by this date (starting in the current year or the first three months of the next) qualify for tax credits or deductions in the year paid. It’s like fast-forwarding your tax savings.

If your child doesn’t qualify for tax credits, they can still rely on loans to pay for tuition. However, without a strong credit history, they might face higher interest rates and tougher loan terms. Building good credit would give your child access to a wider variety of lenders and loan types, giving them more flexibility to choose the best option for their needs.

To build a strong credit history for your child, consider subscribing to credit building services like FreeKick, which offers parent-sponsored credit building for young adults.

FreeKick is an FDIC-insured deposit account by Austin Capital Bank that provides a comprehensive suite of credit monitoring, credit building, and identity protection services for your whole family. FreeKick monitors the identities of up to two parents and six children aged 0 to 25. Your child will also benefit from a credit building feature that automatically builds credit for children aged 13 to 25.

Parent-Sponsored Credit Building and Credit Profile Monitoring

A good credit score can potentially save your child up to $200,000 throughout their lifetime, and FreeKick helps you make this happen through parent-sponsored credit building.

Here’s how the process works:

1. Create an Account—Go to FreeKick.bank and select a preferred plan
2. Set It and Forget It—Once you set up the account, activate the credit building feature in your account dashboard, and FreeKick will automatically start building your child’s credit over the next 12 months. When they reach the legal age (18 in most states), all they have to do is select the “Activate Credit Reporting” option, and FreeKick will start reporting their credit history to the three credit bureaus—Experian, Equifax, and TransUnion
3. Keep Growing—After the initial term, you can either renew the account for another 12 months or close the account and get your full deposit back

Identity Protection Services

Identity theft is widespread, and children are especially vulnerable to this crime.

Disturbing statistics show that a child’s identity is stolen every 30 seconds, which is why FreeKick provides identity protection for both adults and minor children through the following features:

FreeKick Pricing

FreeKick offers two premium account options that are FDIC-insured up to $250,000. Here are the available plans:

Kickstart your child’s financial future while protecting your whole family from identity theft—sign up for FreeKick today.