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7 Min. Read

5 Tax Deductions For Students

Tax Deductions for Students

It’s no secret that college tuition in the US is expensive, and the cost is rapidly rising. Many students, parents, and guardians are looking for ways to keep education expenses under control. One effective way to do that is to claim tax credits and deductions on eligible student expenses. 

As important as it is to take advantage of these tax benefits, they aren’t always easy to recognize. You need to know what you qualify for before you can apply.

Key Takeaways

  • The federal government offers some tax benefits to help Americans pay for college education.
  • Most education tax benefits have a maximum income threshold.
  • Self-employed individuals may claim career-related education as a business deduction.
  • Students may not have to pay income tax on scholarships as long as the money goes toward qualified education expenses.
  • Qualified education expenses typically include tuition, fees, and any needed books and supplies.
  • You can claim college student tax credits by completing Form 8863  and submitting it with your regular tax return (Form 1040).
  • Form 1098-T will be sent to students by the school.

Table of Contents

5 Tax Deductions for College Students

Not all education expenses qualify, but here are 6 ways in which the IRS allows students to claim an education tax break.

Ahead Of Tax Time Every Time

1. American Opportunity Tax Credit 

The American Opportunity Tax Credit (AOTC) provides eligible students a $2,500 maximum annual credit for their first 4 years of college. Eligible students must be enrolled in a postsecondary degree program from a recognized accredited educational institution for at least half time.

Students must have an adjusted gross income of less than $80,000 if single or less than $160,000 jointly if married to qualify. However, you may receive partial credit if your income is above $80,000 but below $90,000 or above $160,000 but below $180,000 for married students with joint income.

AOTC can go towards tuition or course materials. It cannot be used for room and board, insurance, or medical expenses. 

2. Lifetime Learning Tax Credit 

The Lifetime Learning Credit also provides eligible students an annual tax credit. However, there are no restrictions on the number of years the same student can claim it. It may also go towards non-degree programs, such as career development courses.

You do need to be enrolled in at least 1 course at the beginning of the tax year. Like AOTC, there is a maximum income threshold to qualify. Your adjusted gross income must be below $69,000 single or $138,000 jointly. The amount of credit you receive drops after $59,000 or $118,000 and cuts off at the aforementioned thresholds. 

3. Student Loan Interest Deduction 

The student loan interest deduction lets students subtract up to $2,500 of the interest paid on qualified student loans. Your modified adjusted gross income must be below $90,000 if single or below $185,000 if joint in order to be eligible.

You can only claim the deduction if you were enrolled in an eligible educational institution. This would include any institution participating in the US Department of Education’s student aid program. This deduction is available on interest paid on both federal and private loans used to obtain higher education. 

4. Education Tax Deduction for the Self-Employed

Self-employed people can deduct education costs if the education is to help them advance in their field. In this case, the education would technically be considered a business expense, similar to understanding how savings bonds work in optimizing your education fund. To qualify, the education must be work-related, meaning its purpose is to maintain or advance in your current job, career, or salary.

You may claim expenses related to tuition or fees, course materials, lab fees, and some transportation costs. You cannot claim the dollar value of leave time you took to attend classes. 

5. Scholarship Tax Breaks

Students who receive educational assistance benefits may not have to pay income tax on those benefits. This includes financial aid like scholarships, grants, and fellowships. However, your educational benefit money is only tax-free if you use it for qualified higher education expenses.

Qualified expenses include college tuition and any supplies that are required by the course. If you put your financial benefit toward any other expense, it is taxable.  

Be sure to claim the credit you deserve on all your qualified college expenses. Watch the video to see how FreshBooks takes the pain out of tax preparation.

How To Claim Education Deductions and Credits

You should receive Form 1098-T from your school by the end of January. Use this form to claim education credits on your income tax return (Form 8863). Students who are currently dependents must have their parent or legal guardian fill out Form 8863 instead. Once these sections are filled out, file the form with your regular tax return in April. 

Use FreshBooks To Simplify Tax Preparation 

Before you get Form 1098-T, it’s important for you to know exactly which expenses are eligible and how much you can claim. That’s where FreshBooks accounting software can come in handy. Any eligible student can use our tool to track and categorize expenses, so they know exactly what to claim when the time comes.

Try FreshBooks free to start tracking your education tax credits with ease.

If you’re also a small business owner, you can claim more than just college tax credits. Read more about small business tax deductions to see what else you could claim.

It's Time For Owners To Own Tax Season

FAQs about Tax Deductions For Students

Looking to save on college costs now and in future tax years? See if any of the questions in our FAQ can help you out.

What can parents claim for college students? 

Parents who paid for their children’s college tuition may also claim the Lifetime Learning Credit. However, there are several other options that help parents save for their child’s future college expenses. You may opt for the Tax-Advantaged College Savings Plan to avoid paying interest on certain savings bonds intended to pay for your child’s college tuition. 

Are books tax deductible? 

Anything that is required for your course is a deductible education credit. This includes college tuition and fees, books, equipment (e.g., laptops, printers), and lab expenses. Using FreshBooks to track all of your eligible expenses is a great way to stay organized and boost your college savings. 

Do full-time students get tax deductions? 

Full-time students do not automatically get a tax deduction. However, most are eligible for them. Research your options to see what college tax credits apply to you and if your school participates.

What are the IRS rules for full-time students? 

According to the IRS, a full-time student is a student who is enrolled for the number of hours or courses that the school considers to be full-time attendance. Most people in this category are eligible for tax credits, although there are usually income thresholds. However, you will need to claim education credits on your tax return to get a break. 

What are the tax rules for college students?

College students who earn income must file a tax return unless they are a dependent. Dependents must have their legal guardian file for them. This includes income tax on both earned income (jobs) and unearned income (benefits, rental income, etc.). Many benefits are tax-free as long as you spend it on eligible expenses.

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Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.