20 Tax Breaks for Families with College Students
Discover 20 powerful tax breaks that can help families with college students save thousands on tuition, student loans, and education expenses!
- Alyana Aguja
- 6 min read
College expenses can be daunting, but there are useful tax strategies that can save families thousands of dollars annually. From strong credits, such as the American Opportunity Tax Credit to little-known benefits like penalty-free IRA withdrawals for education expenses, these tax savings methods can help lighten the load of higher education. By leveraging these 20 money-saving opportunities, families can maximize their savings and retain more money in their pockets while investing in their child’s future.
1. American Opportunity Tax Credit (AOTC)
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The AOTC provides a maximum of $2,500 per student for qualified education expenses such as tuition, books, and supplies. It pays 100% of the first $2,000 and 25% of the next $2,000. Families can claim the credit for up to four years for each student, and 40% of it (up to $1,000) is refundable.
2. Lifetime Learning Credit (LLC)
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Unlike the AOTC, the LLC has no limit on how many years it can be claimed, making it great for graduate students. It provides up to $2,000 for tuition and other qualified expenses per tax return. However, it is non-refundable, meaning it can reduce your tax bill but won’t result in a refund.
3. Tuition and Fees Deduction (Expired but Watch for Renewal)
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Though it expired in 2020, Congress has reinstated this deduction before. It permitted families to deduct as much as $4,000 in tuition and fees from taxable income. Look each year to determine if lawmakers reinstate it for further tax savings.
4. 529 College Savings Plan Tax Benefits
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Earnings on a 529 plan accumulate tax-free, and withdrawals for qualified education expenses are not taxed. Contributions are also deductible in many states. This is an excellent method of saving taxes while creating an education fund.
5. Coverdell Education Savings Accounts (ESAs)
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Coverdell ESAs enable families to contribute a maximum of $2,000 annually per child, with tax-free growth and withdrawals for educational purposes. They differ from 529 plans because they can be used for college and K-12 expenses. However, there are income limits, so high-income earners might not be eligible.
6. Student Loan Interest Deduction
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If you’re paying interest on a qualified student loan, you can deduct as much as $2,500 annually. It’s an above-the-line deduction, so you don’t have to itemize to take it. It’s phased out at higher income, so see if you qualify.
7. Employer Tuition Assistance (Tax-Free Benefit)
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Employers can provide up to $5,250 annually in tax-free tuition aid for employees. This does not qualify as taxable income, saving both employer and employee money. If your employer provides this benefit, use it to reduce college expenses.
8. Scholarships and Grants (Tax-Free in Most Instances)
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Scholarships and grants applied toward tuition, fees, and books are generally tax-exempt. However, if applied toward room and board, they can be taxed—document to avoid problems at tax time.
9. Education Tax Exclusion for U.S. Savings Bonds
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Interest accrued on Series EE and Series I savings bonds can be tax-free if spent on qualified education expenses. This privilege phases out at higher incomes. Bonds must be in the student’s or parent’s name and bought after 1989.
10. State-Specific Tax Credits for Education
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Numerous states have their own tax credits or deductions for tuition, 529 plan contributions, or student loan interest. To illustrate, Indiana provides a 20% credit (up to $1,000) for 529 contributions. Consult your state’s tax code to optimize savings.
11. Deduction for Work-Related Education
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You can deduct education costs as an unreimbursed business expense if you’re enrolled in college courses to enhance your employability skills. You don’t have to be a full-time student to qualify. The coursework must keep or enhance current job skills, as the IRS requires.
12. Education Assistance for Military Families
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Active-duty military personnel and their families may be eligible for tax-free education benefits. The GI Bill and other military tuition programs can reduce taxable income, and some states offer special tax breaks for veterans using education benefits.
13. Dependent Exemption for College Students (If Applicable)
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Parents can typically claim a college student as a dependent until age 24 if they provide more than half of their support. This can increase eligibility for tax credits and deductions. Make sure your student meets IRS dependency criteria before claiming.
14. Credit for Education-Related Home Energy Improvements
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If you’re remodeling your home office for remote college learning, you might be eligible for energy-efficient home tax credits. The federal government provides credit for adding solar panels, insulation, and energy-efficient appliances. This credit doesn’t cover tuition directly, but it can cut home costs.
15. Tax-Free College Housing Allowance for Clergy & Military
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Military families and clergy may receive tax-free housing allowances that can be applied to college costs, which could leave other income available for fees and tuition. Make sure to monitor how this affects your overall tax position.
16. Business Deduction for Employer-Provided Student Loan Repayment
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Up to 2025, employers can offer a maximum of $5,250 annually toward student loan repayment, tax-free. Both the employer and employee can benefit. If your employer has it, use it to decrease student loan debt.
17. Dependent Care Credit for College-Age Students
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If the college student has a dependent (e.g., a child), he/she might qualify for the Dependent Care Credit. It allows up to 50% of eligible childcare expenses. It can be especially beneficial for non-traditional students with school and family obligations.
18. IRA Withdrawals for Higher Education (Penalty-Free)
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Typically, an early IRA withdrawal comes with a 10% penalty, but qualified college expenses trigger a waiver. Traditional IRA withdrawals, though, are still subject to regular income tax. Using an IRA to pay for schooling can be a tactical method if other resources are depleted.
19. State Tax Deductions for Private College Tuition
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Private college tuition paid out-of-pocket may be tax deductible in some states. Wisconsin, for instance, lets residents deduct as much as $10,000 a year for higher education costs. If your student is attending a private college, look for state-based deductions on tuition.
20. Education-Related Moving Expense Deduction (For Active-Duty Military)
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If a member of the active duty military moves for education-related reasons, they may deduct moving expenses. This includes travel expenses, hotel expenses, and transportation of personal effects. Although moving expenses are no longer deductible for the majority of taxpayers, the military exception remains.