🌟 KEY TAKEAWAYS
The federal government offers tax benefits to help Americans pay for college.
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 funds are used for qualified education expenses.
Qualified education expenses typically include tuition, fees, and any required books and supplies.
You can claim college student tax credits by completing Form 8863 and submitting it with your regular tax return (Form 1040).
The school will send Form 1098-T to students.
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.
5 tax deductions for college students
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. Up to $1,000 of the credit is refundable.
Students must have a modified adjusted gross income (MAGI) of less than $80,000 if single or $160,000 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 be applied toward 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 of up to $2,000 per tax return. 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 (or your dependent) 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 modified adjusted gross income must be below $90,000 single or $180,000 jointly. The amount of credit you receive is reduced after $80,000 or $160,000, and it cuts off at those thresholds.
3. Student loan interest deduction
The student loan interest deduction allows students to deduct up to $2,500 of interest paid on qualified student loans. Your modified adjusted gross income must be below $95,000 if single or below $195,000 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. This is an "above-the-line” adjustment to income you claim before taking a standard deduction on your tax return.
4. Education tax deduction for the self-employed
Self-employed people can deduct education costs if the education helps them advance in their field. I 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 required course supplies. If you put your financial benefit toward any other expense, it is considered taxable income.
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 federal tax return (Form 1040) 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 school 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.
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 (such as 529 plans or Coverdell Education Savings Accounts) to avoid paying taxes on earnings and make tax-free withdrawals intended to pay for your child’s college tuition.
Are textbooks 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 is eligible.
What are the IRS rules for full-time students?
According to the IRS, a full-time student is one enrolled for the number of hours or courses the school considers 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 claimed as a dependent. Dependents must have their legal guardian file on their behalf. This includes income tax on both earned income (jobs) and unearned income (benefits, rental income, etc.). Many educational benefits are tax-free as long as you spend them on eligible expenses.
More useful resources
Explore our diverse tax deduction guides catering to various niches. From small businesses to real estate agents, find valuable insights to optimize your tax savings.
