8 College Expenses That Are Tax-Deductible or Tax-Free

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Is college tuition tax deductible? Are college expenses tax deductible?

In some cases, the answer is yes. Getting an education can be a worthwhile investment and, in many ways, the IRS agrees.

There are many tax breaks available on education-related expenses which can help pay for college. See which of your college costs are tax-deductible or qualify for other savings.

1. Student loan interest tax deduction

First of all, taxpayers who made payments on student loans can deduct the interest paid on these debts. This deduction may be applied to interest paid on both federal and private student loans.

The student loan interest tax deduction can lower your taxable income by as much as $2,500. Therefore, this can reduce your tax liability by as much as $625.

2. 529 account contributions

You can write off contributions to 529 educational savings accounts to reduce your state income tax. In Pennsylvania, for example, the deduction covers up to $15,000 in contributions per beneficiary each year.

“Currently 32 states offer tax breaks for contributing to a 529 plan,” says Joe Orsolini, a certified financial planner at College Aid Planners. “[And] some states offer the tax break for being in the 529 plan for as little as five business days.”

So by simply routing tuition payments through a 529 savings account, you can reduce your taxable income.

3. Sales-tax-free college textbooks

Students are always looking for ways to pay less for college textbooks, which can add hundreds to their educational costs each semester.

Depending on where you live, college students or parents might also get a tax break when buying college textbooks. In total, 21 states plus Washington, D.C. do not tax the sales of college textbooks, according to Student Debt Warriors.

Make sure you know that rules of buying a textbook tax-free, however. Some states only suspend sales tax on textbooks purchased at the college bookstore or books that are required for a course.

4. American opportunity tax credit

The American opportunity credit (AOTC) is a tax credit that you can claim for the first four years of higher education, according to the IRS. As a tax credit, the AOTC counts directly against the taxes you owe.

You can claim qualified educational expenses to lower the taxes you owe by up to $2,500 per year, per college student. If the tax credit reduces your tax liability to $0, the IRS refunds 40 percent of any remaining tax credit (up to $1,000).

To get the full $2,500 credit, however, you must claim at least $4,000 in educational expenses. “First-year community college students … may not have the full $4,000 of eligible expense allowed during their first semester,” Orsolini points out. If this is the case, you can “prepay next semester’s expenses in order to max out the current year’s American opportunity credit.”

There are specific qualification requirements for the AOTC. So make sure you read up on the IRS rules and requirements to ensure you can claim it.

5. Lifetime learning credit

The lifetime learning credit can offset college-related expenses that aren’t eligible for the AOTC. There is no limit on the number of years you can claim the lifetime learning credit. And the student is not required to be working toward a degree.

Under the lifetime learning credit, you can reduce your tax bill by up to $2,000 a year by claiming qualifying educational expenses. Those costs might include tuition and fees, books, and other equipment required for a course.

6. Tuition and fees deduction

Is college tuition tax deductible? Under current IRS rules, all tuition and education-related fees are tax-deductible, up to $4,000. This includes tuitions or fees paid for yourself, your spouse, or a dependent.

However, this deduction is for taxpayers with a modified adjusted gross income of $80,000 annually — or $160,000 when married and filing jointly.

Lastly, out of the AOTC, lifetime learning credit, or tuition and fees deduction, filers can only claim one benefit. Make sure that you choose the best student tax credit for your situation so you can get the biggest cut in your taxes.

7. Home equity loan interest deduction

If you’re a homeowner who has built up some equity, you might be able to borrow against that with either a home equity loan or a home equity line of credit (HELOC) to cover college costs.

When funds from a HELOC or home equity loan are used to help pay for college, you can write off the interest you paid on this debt over the past year — thanks to the mortgage interest deduction.

8. Losses on liquidated investments

Finally, perhaps you sold some investments, like stocks, to help cover educational expenses. If you sold some stocks at a loss, you can write those capital losses off. You could write them off capital losses against capital gains made on other investments and even your regular income.

Taking advantage of this, or other education-related tax benefits, can quickly get complicated. There are many rules and conditions you’ll have to meet to get these college-related tax savings.

Researching your tax savings, or even getting the help of a professional, can be worth the effort. You owe it to yourself to ensure you’re saving on college costs.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.