Tax Breaks for College StudentsDecember 12, 2022
When you’re in college and covering tuition and living expenses, it’s important to watch every penny. That’s why many people who are getting their education are interested in learning about all of the college tax breaks that are available.
If you’re wondering, do college students get tax breaks, this guide will help you to understand all of the different ways you could potentially cut your tax bill.
Do College Students Get Tax Breaks?
Tax breaks come in the form of deductions or credits. Both save you money on your tax bill, but they work differently.
- Deductions let you reduce taxable income by the amount you’re eligible to deduct.
- Tax credits reduce your tax bill directly.
So, for example, if you have $30,000 in taxable income and get a $2,000 deduction, then your taxable income comes down to $28,000. Your savings from the deduction equal the tax you’d have paid on the $2,000.
On the other hand, credits would reduce your tax bill directly, so if you owed $5,000 and got a $2,000 deduction, you would only owe $3,000 in taxes and save the entire $2,000.
The availability of college tax breaks depends on what your income is, as well as what you’re paying for. If you don’t have any income as a college student, you may not have to pay taxes — even without deductions and credits. Your parents may claim tax breaks if they cover your tuition in these situations. Or, some credits are refundable, so you could get more money back from the IRS than you paid in if you aren’t earning income but are paying tuition.
If you are working and paying taxes on your own — or paying tuition on your own — then answering the question, do college students get tax breaks, becomes much more important.
College Tax Breaks You May Be Eligible For
College tax breaks usually center around credits that help you cover tuition and other education costs. Here are some examples of deductions and credits you might be eligible for.
The American Opportunity Tax Credit
The American Opportunity Tax Credit provides a tax credit of up to $2,500 to help you cover tuition and other qualifying educational expenses. Up to 40% of the credit is refundable, which means if you qualify for the credit, the IRS might give you up to $1,000 back even if you didn’t actually owe any taxes for the year.
This tax credit is capped based on income, and eligibility begins to phase out once your modified adjusted gross income exceeds $80,000 for single taxpayers or $160,000 for married joint filers. No credit is available once MAGI hits $90,000 or $180,000. You’ll claim the credit using Form 8863 when you submit your 1040 form. You may claim it for a maximum of four years total.
The Lifetime Learning Credit
The Lifetime Learning Credit is worth up to $2,000, and there is no limit to the number of times you can claim the credit if you have eligible educational expenses. This credit isn’t refundable, though, so you can reduce your tax liability to $0 with it but won’t get money back if you owe less in taxes than your credit is worth.
There are income limits for this credit as well. For 2022, the credit begins to phase out once your modified adjusted gross income hits $80,000 for single filers or $160,000 for married joint filers. Like with the American Opportunity Tax Credit, you lose eligibility entirely with a MAGI above $90,000 or $180,000 for single and joint filers, respectively.
The Student Loan Interest Deduction
If you are paying eligible student loans, you can deduct up to $2,500 in interest costs on your loans. Your maximum deduction is the lesser of $2,500 or the actual interest you paid over the course of the year and you must be legally obligated to pay student loan interest in order to take this deduction.
A deduction can reduce your taxable income but, as mentioned above, doesn’t directly reduce your tax bill. The savings come from not being taxed on up to $2,500 of income earned. If you do not have enough taxable income, you won’t be able to claim the full deduction, and deductions never result in a refund exceeding the tax you paid.
There are income limits for claiming this deduction. You can claim the full deduction if your modified adjusted gross income is below $70,000 for single filers or $140,000 for joint filers. The deduction begins to phase out after that and is no longer available with an income above $85,000 or $165,000, respectively.
Do College Students Get Tax Breaks for Anything Else?
The rules for tax breaks change over time, and eligibility depends on many factors.
For example, a Tuition and Fees Credit was available through the tax year 2020 that provided a deduction of up to $4,000 for qualifying tuition and educational expenses — but this deduction was not renewed. It may return in the future but is not currently available.
In some cases, it is also possible to get state and federal tax savings for contributions to a 529 account, which helps to cover tuition costs. But the rules vary by state.
Because tax rules are in flux and your situation determines what credits you can claim, it’s often best to talk with an accountant or use an online tax filing program to help you determine the opportunities for college tax breaks. That way, rather than just answering the question, do college students get tax breaks, you can find out what tax breaks you are personally eligible for.
If you’re interested in reducing your education costs, you can also look into other options besides just claiming tax breaks. For example, if you have private student loans, you may wish to refinance them in order to reduce your interest rate and save on financing charges.
By being proactive and controlling your finances in college and beyond, you can hopefully ensure you pay as little as possible for a high-quality education that will set you up for a secure future.