Overview of Education Tax Benefits
Students and their families can get money for college by filing their federal income tax returns. These education tax benefits include tax deductions and tax credits for college savings, tuition and fees, scholarships, employer tuition assistance and student loan interest. Tax deductions reduce the amount of income that is taxed, while tax credits directly reduce the amount of taxes paid.
Most of the tax deductions are above-the-line exclusions from income, which reduce the taxpayer’s adjusted gross income (AGI). Taxpayers can claim these deductions even if they don’t itemize. The reduction in AGI may help them qualify for other tax benefits and for more need-based financial aid. Thus an exclusion from income may provide both direct and indirect financial benefits. Other tax deductions are below-the-line or itemized deductions that reduce the amount of taxable income.
Some of the tax credits are refundable and some are not. When a tax credit is not refundable, the tax credit is capped at the taxpayer’s tax liability.
Most of the education tax benefits are restricted to taxpayers who file federal income tax returns as single or as married filing jointly. Married taxpayers who file separate federal income tax returns are not eligible.
Picking the best mix of education tax benefits can be complicated, in part because of Internal Revenue Service (IRS) rules that prevent double dipping. Taxpayers can’t use the same educational expenses to justify more than one education tax benefit.
Summary of Education Tax Benefits
A summary of the various education tax benefits appears in the following tables.
| Tax Benefit | Benefit Amount | Eligible Expenses | Income Phaseouts |
|---|---|---|---|
| American Opportunity Tax Credit | $2,500 tax credit per student 100% of first $2,000 25% of second $2,000 Limit: First 4 years of postsecondary education Must be degree-seeking, enrolled >= half-time 40% refundable ($1,000), not subject to AMT Reverts to Hope Scholarship after end of 2017 |
Tuition, fees and course materials (such as textbooks, supplies and equipment) | 2014 Tax Year $80,000 to $90,000 (single) $160,000 to $180,000 (joint)2015 Tax Year Unchanged |
| Lifetime Lerning Tax Credita | $2,000 tax credit per tax return 20% of first $10,000 Unlimited number of years Does not need to be degree-seeking |
Tuition and fees | 2014 Tax Year $54,000 to $64,000 (single) $108,000 to $128,000 (joint)2015 Tax Year $55,000 to $65,000 (single) $110,000 to $130,000 (joint) |
| Tuition and Fees Deduction | $4,000 exclusion from income Reduced to $2,000 in income phaseout band Unlimited number of years Expires after the end of 2014 |
Tuition, fees and, if required by and paid to the school, textbooks, supplies and equipment. | 2014 Tax Year $65,000 to $80,000 (single) $130,000 to $160,000 (joint)2015 Tax Year Unchanged |
| Employer Tuition Assistance | $5,250 exclusion from income per employee Unlimited number of years Does not need to be degree-seeking |
Tuition, fees, books, supplies, equipment | None |
| Business Deduction for Work-Related Education | Exclusion from income for qualifying work-related education expenses greater than $5,250 if the expenses are a working condition fringe benefit. The education must be required by the employer or law to keep present job, salary and/or status, but cannot be necessary to meet minimum educational requirements of present trade or business or to qualify employee for a new trade or business. Unlimited number of years. | Tuition, fees, books, supplies, equipment, transportation, travel | None |
| Tuition Gift Tax Exclusion | Tuition paid directly to a college or university is not subject to gift taxes. May be treated as untaxed income to the student on the FAFSA, affecting eligibility for need-based financial aid. Unlimited number of years |
Tuition only | None |
| Tax Benefit | Benefit Amount | Eligible Expenses | Income Phaseouts |
|---|---|---|---|
| Student Loan Interest Deduction |
$2,500 exclusion from income for interest on federal and private student loans Unlimited number of years |
Student loan interest | 2014 Tax Year $65,000 to $80,000 (single) $130,000 to $160,000 (joint)2015 Tax Year Unchanged |
| Student Loan Forgiveness, Cancellation and Repayment Assistance | Excluded from income if forgiveness is conditioned upon working for a period of time in a particular profession for any of a broad class of employers | Amounts of cancelled or forgiven student loan debt for student loans made by government agencies or educational institutions | None |
| Tax Benefit | Benefit Amount | Eligible Expenses | Income Phaseouts |
|---|---|---|---|
| Scholarships, Fellowships and Grants | Exclusion from income of amounts spent on qualified expenses if the student is a degree candidate and the scholarship is not payment for services. The full amount is exempt from FICA whether or not the student is a degree candidate. Unlimited number of years |
Tuition, fees, required course-related materials (books, supplies, equipment) | None |
| Tax Benefit | Benefit Amount | Eligible Expenses | Income Phaseouts |
|---|---|---|---|
| 529 College Savings Plans | Earnings are tax-deferred. Qualified distributions are excluded from income. The earnings portion of a non-qualified distribution is taxed at the beneficiary’s rate and subjected to a 10% tax penalty. Unlimited number of years |
Tuition, fees, books, supplies and equipment, expenses for special needs services. Room and board if enrolled at least half-time. | None |
| Prepaid Tuition Plans | Earnings are tax-deferred. Qualified distributions are excluded from income. The earnings portion of a non-qualified distribution is taxed at the beneficiary’s rate and subjected to a 10% tax penalty. Unlimited number of years |
Tuition, fees, books, supplies and equipment, expenses for special needs services. Room and board if enrolled at least half-time. | None |
| Coverdell Education Savings Accounts | Earnings are tax-deferred. Qualified distributions are excluded from income. The earnings portion of a non-qualified distribution is taxed at the beneficiary’s rate and subjected to a 10% tax penalty. $2,000 annual contribution limit from all sources through age 18 Must be used by age 30 unless special needs |
College tuition, fees, books, supplies and equipment. Room and board if enrolled at least half-time. Elementary and secondary school expenses (tutoring, room and board, uniforms, transportation). | 2014 Tax Year Phaseout on contributions: $95,000 to $110,000 (single) $190,000 to $220,000 (joint)2015 Tax Year Unchanged |
| Education Savings Bond Program | Exclusion from income of interest on Series EE bonds issued on or after January 1, 1990 and all Series I bonds. Unlimited number of years |
Tuition and fees, or rollover into a 529 plan, prepaid tuition plan or Coverdell ESA | 2014 Tax Year $76,000 to $91,000 (single) $113,950 to $143,950 (joint)2015 Tax Year $77,200 to $92,200 (single) $115,750 to $145,750 (joint) |
| Kiddie Tax | Unearned income between one and two times the standard deduction for a dependent may be taxed at the child’s rate, depending on the age of the child. | All expenses allowed. | None |
| Tax Benefit | Benefit Amount | Eligible Expenses | Income Phaseouts |
|---|---|---|---|
| Early IRA Distributions for Higher Education | No 10% additional tax penalty on early distributions from an IRA for qualified education expenses, but earnings are otherwise still taxable as ordinary income. Unlimited number of years |
Tuition, fees, books, supplies, equipment and expenses for special needs services. Room and board if enrolled at least half-time. | None |
| Roth IRA | A return of contributions from a Roth IRA is excluded from income, but may nevertheless affect eligibility for need-based financial aid. | All higher education expenses | 2014 Tax Year Phaseout on contributions: $114,000 to $129,000 (single), $181,000 to $191,000 (married filing jointly) and $0 to $10,000 (married filing separately)2015 Tax Year Phaseout on contributions: $116,000 to $131,000 (single), $183,000 to $193,000 (married filing jointly) and $0 to $10,000 (married filing separately) |
| Loans from Retirement Plans | Qualified retirement plan participants may borrow up to half of the vested account balance with a 5 year repayment term. This includes 401(k), 403(b) and government retirement plans, but not IRAs. | All expenses allowed. | None |
| Hardship Distributions from 401(k) and 403(b) Retirement Plans | Plan participants may take a hardship distribution from a 401(k) or 403(b) retirement plan to pay for college tuition, fees, room and board. Distributions are limited to elective contributions. Hardship distributions may be subject to the 10% early distribution tax penalty. | Tuition, fees, room and board. | None |
Additional Information
IRS Publication 970, Tax Benefits for Education (PDF), provides additional detail on the various education tax benefits.
The IRS also publishes a special information center on Tax Benefits for Education and interactive tax assistants for evaluating eligibility for the education tax credits/deductions and student loan interest deduction. See also IRS Tax Tip 2010-30. Questions about education tax benefits are among the most frequently asked questions received by the IRS.
Many students file federal income tax returns for the first time when enrolled in college. IRS Publication 17, Your Income Tax, provides a good introduction, covering such topics as filing status, personal exemptions, withholding, estimated tax, standard deductions, itemized deductions, income tax and tax credits.
Income phaseouts are updated annually by the IRS. The 2013 income phaseouts were published in Revenue Procedure 2012-41 and Revenue Procedure 2013-15. The 2014 income phaseouts were published in Revenue Procedure 2013-35 on November 18, 2013. The 2015 income phaseouts were published in Revenue Procedure 2014-61 on October 30, 2014.
The US Government Accountability Office (GAO) published a report, Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes (GAO-08-717T, May 1, 2008), which finds that the complexity of the many education tax benefits leads to suboptimal behavior by taxpayers. Some eligible taxpayers do not claim the education tax benefits. Others could have obtained a greater reduction in their tax liability by claiming a different mix of tax credits and deductions.
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