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

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are college expenses tax deductible

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

In some cases, the answer is yes. Getting an education is an important investment and, in many ways, the IRS agrees.

There are many tax breaks available on college-related expenses which make college more affordable for taxpayers. See which of your college costs are tax-deductible or qualify for other savings.

1. Student loan interest

First of all, taxpayers who made payments on student loans can deduct the interest paid on these debts.

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 accounts to reduce your state income tax. In Pennsylvania, for example, the deduction is up $14,000 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 5 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

Depending on where you live, college students or parents might also get a tax break when buying college textbooks. In total, 13 states do not tax sales of textbooks, according to The New York Times.

An additional 13 states will suspend the sales tax on college tax books under certain conditions. For example, some states suspend sales tax on textbooks purchased at the college bookstore or books that are required for a course.

4. 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.

5. American opportunity tax credit

The American opportunity credit 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.

6. 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.

7. HELOC loan interest deduction

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

Because you’ve used a HELOC to help with college, you can write off the interest paid on a HELOC in the past year thanks to the mortgage interest deductions.

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 losses off. You could write them off against 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.