Updated for 2023.
College can be expensive, but the IRS offers several tax benefits for college students to make higher education more affordable for Americans.
Whether you’re a parent of a college student or paying your own way through school, here are 10 important things to know about college and taxes.
At a glance:
Filing a tax return can be advantageous and get you a tax refund even if you don’t technically have to file.
Know which educational tax credits and deductions you qualify for, such as the American Opportunity Credit, Lifetime Learning Credit, and student loan interest deduction.
Utilize tax-free education savings plans like 529 plans or Coverdell accounts to pay for college expenses.
1. File even if you don’t have to.
Technically, you only have to file a tax return if you reach a certain income level.
For example, if you were a dependent who earned more than $13,850 in 2023, you’re required to file an income tax return. But even if you earned less than that, you might be due a refund if your employer withheld taxes from your paycheck.
Take some time to file, and you might discover you’re owed a tax refund — you don’t want to leave that lying on the table.
2. Consider going alone.
In most cases, it makes perfect sense for a traditionally aged college student to remain a dependent for tax purposes.
But there are certain situations where it might be advantageous for college students to file independently. For example, some higher education tax credits are only available to moderate-income earners. You might be better off filing independently if your parents earn too much to qualify for these credits. Just make sure to sit down with your parents or student and have a conversation about whether you meet the dependency requirements and how you plan on filing.
3. Check out the Lifetime Learning Credit.
The Lifetime Learning Credit is one of two tax credits available to cover college tuition. It will pay up to $2,000 per year per family to help cover qualified educational expenses.
The credit is good for every year in which a student is enrolled in college, graduate school, or part-time learning.
4. Apply for the American Opportunity Tax Credit.
The American Opportunity Tax Credit (AOTC) is even more generous, offering up to $2,500 per year per student, compared to the Lifetime Learning Credit cap of $2,000 per family.
One drawback: You can only claim it for four years per student, so there is no credit for graduate work if you choose to continue your higher education after undergrad.
5. The AOTC might pay you.
One more excellent perk of the American Opportunity Tax Credit: The $2,500 credit is refundable up to $1,000, meaning that if you have no tax liability, you’ll still receive up to that amount as a tax refund.
If you’re eligible for the Lifetime Learning Credit and the American Opportunity Credit for the same student in the same year, you can only choose one credit, but not both. If you’re trying to decide between them, typically, the AOTC is more valuable due to the higher credit amount and its partial refundability.
6. Deduct your student loan interest.
Millions of current college students and college graduates make student loan payments every month. Like mortgage interest, student loan interest is deductible up to a limit of $2,500 or the amount of interest you actually paid — whichever is lower.
Even better, you can take the student loan interest deduction even if you don’t itemize.
7. Get a tax refund for work-study.
Unlike other types of college financial aid (like grants and scholarships), the money you earn from a work-study job is considered taxable income.
But that’s not all bad.
The school will withhold income taxes from your paychecks. So, when it’s time to file your taxes in April, you will likely get a tax refund.
8. Pay college expenses tax-free.
In both cases, money in the accounts grows tax-free. But even better, you can withdraw money tax-free if the funds are used to pay for qualified education expenses.
9. In a crunch, tap the IRA.
It’s generally not a good idea to withdraw from a retirement account early. Not only are you taxed on the cash, but you’re also hit with a 10 percent penalty.
There’s a loophole, though, for qualified education expenses. If you withdraw money to pay for college costs, you’ll still owe taxes, but the 10 percent penalty is waived.
10. Geography matters.
If you attend school in a different state than your tax home (aka your parents’ house), make sure you pay taxes on any earnings from both states if applicable.
For example, different tax rates may apply if you have a summer job at home and a part-time job at school. You might even get lucky and work in a state without income tax. Read up on both states’ tax laws and be prepared to file twice if necessary.
This article is for informational purposes only and not legal or financial advice.
– Tax Tips and Tax Planning Resources | TaxAct Blog