College is expensive, but there are several valuable tax breaks that can help ease the pain.
[Read: 10 Tax Credits You May Qualify for This Year]
You may be able to cut your tax bill by up to $2,500 if you’re paying college tuition, and you may even be eligible for tax credits that can help cover the cost of continuing education classes to improve your job skills.
Interest you pay on student loans might also be tax deductible — which is especially timely now that payments have resumed. You can use tax-advantaged savings accounts to pay for college costs, and new rules let you roll over unused money in a 529 college-savings plan into a Roth IRA.
Here’s how families can make the most of these tax breaks to stretch their savings:
American Opportunity Credit for College Costs
The American opportunity credit can cut your tax liability by up to $2,500 if you’re paying for the first four years of higher education for yourself, your spouse or a dependent you claim on your tax return.
To qualify for this credit, the student must be enrolled at least half time and be pursuing a degree or other recognized educational credential at a college, university, vocational school or other eligible postsecondary educational institution.
To claim the full credit, your modified adjusted gross income, or MAGI, must be $80,000 or less if you’re filing as single or head of household — or $160,000 or less for married couples filing jointly.
You can claim a partial credit if your MAGI is more than $80,000 but less than $90,000 if you’re filing as single or head of household — or more than $160,000 but less than $180,000 if you’re married and filing jointly. The credit is calculated as 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 — making the maximum credit $2,500 per student.
Eligible expenses include tuition and fees, plus books, supplies and equipment.
“The expenses must be paid during the tax year for you to qualify for the tax credit, but you can pay for expenses in 2023 for an academic period that begins during the first three months of 2024,” says financial aid expert Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”
You’ll usually receive Form 1098-T from the college reporting the qualified expenses you paid. To claim the credit, use IRS Form 8863. For more information, see IRS Publication 970 Tax Benefits for Education.
Lifetime Learning Credit for Grad School and Continuing Education
If you’re going to grad school or taking any continuing education classes — even if you aren’t working toward a degree — you may be eligible for the lifetime learning credit. It’s worth 20% of up to $10,000 in eligible expenses, with a maximum credit of $2,000 per tax return.
“Having multiple individuals in college does not get you additional credits,” says Tracie Miller, a CPA and professor at Franklin University. Eligible expenses include tuition and required fees for yourself, your spouse or a dependent you claim on your tax return.
The income limits are the same as they are for the American opportunity credit — to claim the full credit for tax year 2023, your MAGI must be $80,000 or less if you’re filing as single or head of household, or $160,000 or less for joint filers. You can claim a partial credit if your MAGI is between $80,000 and $90,000 as a single or head of household filer — or $160,000 to $180,000 as a married person filing jointly.
There’s no limit to the number of years you can claim the lifetime learning credit, and its education requirements are much broader than the American opportunity credit.
You can take the lifetime learning credit for graduate or undergraduate expenses, and you don’t have to be enrolled at least half time or working toward a degree. You can also claim the credit for continuing education, certificate programs or separate classes you take to acquire or improve job skills, and it’s available for an unlimited number of tax years.
The key is that the class must be offered by an eligible educational institution, including any college, university, vocational school or other postsecondary educational institution eligible to participate in a U.S. Department of Education student aid program.
This credit can also be valuable for people who lost their jobs and took classes to improve their job prospects.
“Courses to acquire new skills may be especially relevant right now,” says Melody Thornton, a CPA and tax manager at Fitzgerald and Company in San Diego.
You should receive Form 1098-T from the eligible institution reporting the qualified expenses you paid. To claim the credit, complete IRS Form 8863.
Deduction for Student Loan Interest
If you’re paying back student loans, you may be able to deduct up to $2,500 in interest. Payments restarted on federal student loans, and interest began accruing, on September 1, 2023. Many borrowers who didn’t pay any student loan interest during the pandemic will be able to start claiming this tax break again, Kantrowitz says.
[READ: Should You Refinance Your Student Loans in 2024?]
“The student loan interest deduction allows a deduction for interest you pay on certain student loans for you, your spouse or a dependent. The interest deduction goes to the person legally obligated to pay the interest,” says Timothy M. Todd, a law professor at Liberty University School of Law in Lynchburg, Virginia.
“So, if a parent takes out the loan for his or her dependent child and the parent makes the interest payments, the parent gets the deduction. However, if a student takes out the loan and the parent pays the interest, it is treated as though the parent transferred the money to the student who then makes the payment,” he adds.
The student can’t get the break, however, if their parents claim them as a dependent.
To qualify for the deduction in 2023, your MAGI must be less than $90,000 if you’re filing as single or head of household — or $185,000 if you’re married and filing jointly. The size of the deduction starts to phase out if your MAGI is more than $75,000 if single or head of household — or $155,000 for married, fjoint filers.
There is a $2,500 cap on the deduction per return, which means that a married couple gets a maximum deduction of $2,500 even though they could each deduct up to $2,500 if they were single, Todd says. You don’t have to itemize to claim the student loan interest deduction.
Maximizing 529 Tax Breaks for Education at All Ages
You can withdraw money tax-free from a 529 savings plan for college tuition, fees and equipment such as a computer or printer. You can also withdraw money tax-free for room and board if you’re enrolled at least half time, even if you don’t live on campus.
Eligible expenses for off-campus housing are generally limited to room and board costs that the college reports for financial aid purposes (look for the number on your financial aid reward page or ask the aid office).
“For example, if the room and board cost reported by the school is $15,000 but it costs $30,000 for the student living off campus, then only $15,000 is a valid 529 expense,” Thornton says.
You can also withdraw money tax-free for a computer, whether you attend school on campus or virtually. Computer-program costs are also eligible expenses.
“As long as the student is using it for 529-related coursework, then you can use the 529 for those expenses,” says Mary Morris, CEO of Virginia529.
There’s no age limit for using the money, and you don’t need to be working toward a degree.
[READ: How to Roll Over Funds From a 529 College Savings Plan to a Roth IRA]
“One of the really important things we see are adults going back to school — maybe they lost their job and are taking classes or a certificate program that puts them on a road to a new career,” Morris says.
You can withdraw money tax-free from a 529 for those expenses as long as you’re taking the classes from an eligible educational institution. You’ll get the biggest tax benefits if you can keep the money growing for years in the tax-advantaged account.
It’s Not Too Late to Start a 529 Plan
If you don’t already have a 529, it might still be worthwhile to open one and make the most of any tax breaks you get for contributions, even if you plan to use the money soon for education expenses.
“For parents thinking of starting a 529 plan, it’s important to realize that although many states offer a state income tax break for contributions to such plans, states typically require that the contributions be made to the 529 plan sponsored by that state,” Todd says.
Visit the Saving For College website for details about each state’s plans and tax rules, and the College Savings Plans Network website for information and links to each state program’s website.
You can also withdraw up to $10,000 per year, per beneficiary, from a 529 to pay tuition for kindergarten through 12th grade and avoid paying taxes.
If your child doesn’t use the money for educational expenses, you can switch the beneficiary to another eligible family member. If you take withdrawals that aren’t for eligible education expenses, the earnings are taxable and subject to a 10% penalty, although the penalty is waived in some circumstances.
“If a child receives a scholarship, a distribution for up to the amount of the scholarship can be made without being subject to the 10% penalty,” Miller says. “The taxpayer must, though, still pay tax on the earnings of this distribution.”
Even if your child qualifies for a scholarship, you may still have other eligible expenses that qualify for tax-free withdrawals, such as room and board, fees, books and equipment.
New 529 Options in 2024
The Secure 2.0 tax law expanded the options for unused 529 money. Starting in 2024, families saving for education in 529 plans can roll over unused funds from those accounts into Roth IRAs without tax penalties. The 529 plan beneficiary must own the Roth but you can change the beneficiary, Kantrowitz says.
You can roll over only up to the annual Roth IRA contribution limit each year — $7,000 for people under age 50 in 2024 — with a $35,000 lifetime limit per beneficiary. The 529 plan must have been in existence for at least 15 years, and only funds that have been in it for at least five years are eligible for a rollover, he says.
“Financial professionals agree that although there are limitations to the rollovers, it will provide a new option for individuals who find themselves with leftover or unused money in their 529 account but who don’t want to incur the tax penalties that come with taking a nonqualified withdrawal,” Morris says.
Coordinating Tax Credits for Education With Tax-Free 529 Withdrawals
You can qualify for the American opportunity credit or lifetime learning credit and take tax-free 529 withdrawals in the same year, but you need to be careful.
“To optimize the tax benefits, you can’t use 529 distributions for the same expenses,” Todd says.
“In short, you can’t ‘double dip.’ If you end up taking out more from the 529 plan than qualified education expenses (after accounting for the expenses used for an education credit), part of the 529 distribution may be taxable,” he says.
For example, if you claim the full American opportunity credit, the $4,000 in tuition and fees you claim is not considered a qualified education expense for your 529, and part of the distribution may be taxable.
If you claim the full lifetime learning credit, you can’t take tax-free 529 withdrawals for the first $10,000 in tuition expenses you claimed for the credit but you can withdraw money tax-free from the 529 for additional expenses.
“If you withdraw money from the 529 plan and are possibly eligible to claim a credit, make sure to keep receipts for all costs so that they maximize the benefits between the 529 and the credit,” Thornton says.
More from U.S. News
Everything You Need to Know About Claiming a Mileage Tax Deduction
Can You Take the Home Office Deduction?
Tax Deadline 2024: When Are Taxes Due?
Educational Tax Credits and Deductions You Can Claim for Tax Year 2023 originally appeared on usnews.com
Update 02/27/24: This story was published at an earlier date and has been updated with new information.
