Education Tax Benefits – Before, During and After College

With so many tax-favored plans, credits, and deductions, education tax benefits can seem complicated.

Where do you start?

If the number of available education tax benefits is any indication, the government has taken interest in promoting higher education and making it easier for more people to attain it.

Sorting out all the different benefits can be confusing but it’s simpler to look at them by time period.

Here are the education tax benefits you can generally take advantage of at different points in your educational process:


Educate Tax Benefits - A complete Guide - TaxAct

Before college: Save, save, save

You’ll want to start well ahead of time to make these tax-favored plans worth their while.

Choose from these basic educational savings plans:

Qualified Tuition Program (529 Plan)

With a 529 Plan, you make nondeductible contributions to an account. When it’s time to pay for college, you take tax-free withdrawals to pay tuition and fees.

If you use the prepaid plan, you use tax-free education credits.

A 529 Plan is in your name, not the child’s. Depending on your state, you may be able to contribute more to a 529 Plan than is allowed by other programs.

Unlike other programs, the 529 Plan does not depend on your income.

If you’re making a lot more money when it comes time for college, the plan is not restricted based on your income level.

Education savings bond program

You can purchase Series EE U.S. Savings Bonds issued after 1989, or Series I bonds. You purchase them in your name.

When it’s time for college, you cash in the bonds. You don’t pay tax on the bond interest to the extent the expenses meet the qualifications.

Be careful if your income may be higher when you want to use the bonds.

This tax benefit starts to phase out when you reach a modified adjusted gross income level of $76,000 ($113,950 if married filing jointly).

Coverdell Education Savings Account (ESA)

These plans are made in the name of the student, not the parent or benefactor. You (or other contributors) can contribute up to a combined total of $2,000 per year to the student’s account.

You don’t get a deduction for your contribution, but when the child goes to college, he or she can take tax-free withdrawals of the original contribution plus any interest or other earnings.

You can also choose to take distributions from ESAs for elementary and secondary education.

During college: Take credits and deductions

When you’re going to college or sending someone there, every little tax perk helps.

American Opportunity Tax Credit (formerly the Hope Credit)

This one is more than a little tax perk.

This credit pays for 100% of up to the first $2,000 you spend on tuition, fees, books, supplies, and equipment.

You may also qualify to get 25% of the next $2,000 back as a credit – for a total credit of up to $2,500.

The credit can be for you, your spouse, or your dependent.

The student must be enrolled at least half time and be in the first four years of college. You might not qualify for this credit if you have a higher income.

This credit starts to phase out if your modified adjusted gross income is over $80,000 ($160,000 if filing jointly).

You cannot take the credit if your modified adjusted gross income is over $90,000 ($180,000 if filing jointly).

Lifetime Learning Credit

The next best thing to the American Opportunity Tax Credit is the Lifetime Learning Credit.

It gives you a credit equal to 20% of your tuition and certain related expenses up to $10,000. That’s a credit of up to $2,000 per student.

This credit starts to phase out if your modified adjusted gross income is over $54,000 ($108,000 if filing jointly).

You cannot take the credit if your modified adjusted gross income is over $64,000 ($128,000 if filing jointly).

Note you cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.

Higher education expenses deduction

This deduction expired at the end of 2013. Don’t throw those receipts away yet, however.

Congress has been in the habit of extending provisions such as this one at the last minute.

This deduction in the past has let you reduce your taxable income by as much as $4,000, even if you don’t itemize your deductions.

After college: Deduct student loan interest

You saved for college, you took advantage of tax benefits while going to college, but you still had to take out student loans to reach the finish line.

At least the IRS is there, offering one more educational tax benefit for you.

If you pay interest on student loans, you may be able to deduct the interest as an adjustment to income, regardless of whether you itemize your deductions.

You can deduct student loan interest for as long as it takes you to pay it off.

If you have a huge amount of student loan debt, you may not be able to deduct all the interest.

This deduction is limited to $2,500 in student loan interest.

If your modified adjusted gross income is $65,000 or higher ($130,000 if filing jointly), your maximum deduction begins to be phased out.

You cannot take this deduction if you are married and filing separately.

TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. It’s the best deal in tax. Start free now or sign into your TaxAct Account.

More to explore:

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

Take control of your taxes.

Sign up to get the latest tax tips sent straight to your email for free.

Take control of your taxes. Get our latest tax tips straight to your email for free.

More from the TaxAct Blog