Want a higher paying job? A college education might make that possible. Want to get into a better college? Perhaps attending a private high school will help. Is it time for a career change? A vocational school might be for you.
Education can certainly be a path to greater financial success and security, but it can be pricey. Fortunately, there’s a full menu of education tax credits, deductions, and exemptions to help you pay common school-related expenses.
From the time a parent starts saving for a child’s education to the date a student finally pays off their student loans, Uncle Sam has something up his sleeve that will help parents, students, and others cut their tax bill. There aren’t very many other aspects of American life that get as many tax breaks, which just goes to show how important education is in our society.
So you don’t miss out on any of the potential tax benefits, I pulled together a list of all the education tax breaks available under the federal tax code. Dive in and see how many education tax credits, deductions, and exemptions you can claim. And be sure to take advantage of all the tax breaks for which you qualify, so you can reach your full intellectual and financial potential.
Table of Contents
1. 529 Plans
Let’s start at the beginning: saving money for a future student’s educational expenses, particularly for college.
The most popular way to save for college these days is with a 529 plan. While there are no federal tax breaks available when you open or fund a 529 plan, there are clear tax advantages down the road.
WealthUp Tip: Many states offer income tax deductions or credits for contributions to a 529 plan. You often have to contribute to an in-state 529 plan to qualify for a state tax break, but a few states offer a tax benefit for contributions to any 529 plan. Check with the state tax agency where you live for details.
With a 529 savings plan, which is the most common type of 529 plan, you contribute money to an account set up for a designated beneficiary (such as a child or grandchild), that money grows tax-free, and withdrawals from the account are also tax-free as long as the funds are used for 529 plan qualified education expenses.
When it comes to college costs, qualified higher education expenses for 529 plan purposes include:
– Tuition, fees, books, supplies, and equipment required for the enrollment or attendance
– Room and board for students who are attending on at least a half-time basis
– Services for special-needs students
– Computers or peripheral equipment, software, and internet access used primarily by an enrolled student
These higher education expenses can be paid to any college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs.
529 plans aren’t just for college expenses, though. For instance, you can use up to $10,000 from a 529 savings plan to pay tuition at any public or private (including religious) elementary or secondary school.
Up to $10,000 can also be used to pay off student loans for the beneficiary or a sibling.
Money from a 529 plan can also be used for fees, books, supplies, and equipment required for participation in a registered and certified apprenticeship program.
WealthUp Tip: Some states don’t follow the federal rules for elementary and secondary school tuition, student loan payments, or apprenticeship programs. As a result, 529 account funds used for these purposes might be subject to state income tax.
If 529 plan funds aren’t used for qualified education expenses, a 10% penalty applies and related earnings are considered taxable income subject to the same federal income tax rates as wages, tips, unemployment compensation, gambling winnings, and other “ordinary” income.
To avoid federal income tax and penalties, you can transfer unused funds to a family member’s 529 account or ABLE account. Plus, starting in 2024, a beneficiary can roll over up to $35,000 of leftover money in a 529 savings plan that’s been open for at least 15 years into a Roth IRA in his or her own name.
Finally, some states also offer a prepaid tuition plan, which is a type of 529 plan. With a prepaid tuition plan, you pay future college tuition and fees at current rates. As with a 529 savings plan, there’s no tax deduction for contributions to a prepaid tuition plan, but there’s also no tax on earnings or distributions for qualified educational expenses.
2. Coverdell Education Savings Accounts (ESAs)
Like a 529 plan, a Coverdell Education Savings Account (ESA) can be used to save for educational expenses.
From a tax perspective, Coverdell ESAs work the same way as 529 savings plans. There are no tax breaks when you put money in a Coverdell ESA, but money in the account grows on a tax-free basis and withdrawals are likewise not taxed if they’re used for qualifying educational expenses. If funds aren’t used for qualified expenses, then taxes must be paid on related earnings and a 10% penalty applies.
There are some important differences between Coverdell ESAs and 529 plans, though. For example, unlike 529 plans, with a Coverdell ESA:
– Contributions must be made before the beneficiary is 18 years old (except in the case of a special needs beneficiary).
– Annual contributions per beneficiary are limited to $2,000.
– The $2,000 annual contribution limit is gradually reduced to $0 if the contributor’s modified adjusted gross income (AGI) is between $95,000 and $110,000 ($190,000 to $220,000 for married couples filing a joint tax return).
– Funds in the account must be distributed within 30 days after the beneficiary reaches age 30 (except in the case of a special needs beneficiary).
– There’s no limit on distributions used for elementary or secondary school expenses.
Because of the additional restrictions on contributions, Coverdell ESAs aren’t as popular as 529 plans. However, if you’re saving for elementary or secondary school expenses, a Coverdell ESA might be a better option because there’s no limit on distributions for these expenses. Money from a Coverdell ESA can also be used for more than just tuition if your child is attending a private K-12 school.
3. IRA Withdrawals for Education Expenses
Some people use individual retirement accounts (IRAs) to pay for college. That’s not always the best plan, but it works in some situations.
For example, using an IRA to cover college costs might be your best option if you suddenly realize that your high-school-age child might go to college, you haven’t started saving for college expenses, and you already have a well-funded IRA.
Furthering your own education later in life is another potential scenario where using IRA funds to pay for college or vocational school might make sense. (Just make sure you still have enough money for retirement!)
But what makes IRAs an attractive option for education savings? It’s because the normal 10% penalty for early withdrawals—generally before you turn 59½ years old—is waived if the money is used on qualified higher education expenses for:
– Your spouse
– Your or your spouse’s child, foster child, or adopted child
– Your or your spouse’s grandchild
Expenses that qualify for the penalty waiver are generally the same as those allowed for 529 plan funds, except the waiver doesn’t apply if IRA funds are used for K-12 tuition, student loan repayment, or apprenticeship programs.
Regardless of whether the 10% early distribution penalty is imposed, distributions from a traditional IRA are also generally subject to federal income tax (although you can get a tax deduction when you contribute to a traditional IRA). If you withdraw money from a Roth IRA, income taxes apply to any portion of the distribution that represents earnings if you have not yet reached age 59½. (No tax applies to withdrawn contributions to a Roth IRA.)
WealthUp Tip: In addition to any other available tax breaks, you might also qualify for the Saver’s Credit when you contribute to an IRA. This tax credit can be worth up to $1,000 ($2,000 for married couples filing a joint return).
4. Scholarships, Grants, and Other Types of Educational Assistance
Congratulations if you’re lucky enough to get a scholarship, grant, or other form of educational assistance! As a bonus, you might not have to pay tax on the amount awarded.
For example, if you’re a candidate for a degree at an eligible educational institution, a scholarship or fellowship grant is generally tax free if it:
– Doesn’t exceed your qualified education expenses
– Isn’t designated or earmarked for something other than qualified education expenses (e.g., room and board)
– Doesn’t specify that it can’t be used for qualified education expenses
– Doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship or grant.
For purposes of tax-free scholarships and fellowship grants, qualified education expenses include:
– Tuition and fees required to for enrollment or attendance
– Course-related expenses (e.g., fees, books, supplies, and equipment)
Expenses that don’t qualify include room and board, travel, research, clerical help, and equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.
WealthUp Tip: Pell grants and other need-based grants are treated as scholarships for tax purposes. However, an appointment to a U.S. military academy (e.g., West Point, Naval Academy, etc.) isn’t considered to be a scholarship or fellowship grant. As a result, payments received by cadets and midshipmen at a services academy are taxable income.
Other forms of assistance might also be tax free. For instance, payments to veterans from the Department of Veterans Affairs for education, training, or subsistence aren’t taxed.
You might also be able to avoid a tax bill if your tuition is reduced or completely waived. For an undergraduate student or someone attending a K-12 school, a tuition reduction or waiver is tax-free only if you’re either:
– An employee of the school
– A former employee of the school who retired or left on disability
– A surviving spouse of someone who died while an employee of the school or who retired or left on disability
– A dependent child or spouse of a person described above
If you’re attending graduate school, you must teach or do research for your school for a tuition reduction or waiver to be tax free. Otherwise, any tuition reduction or waiver that’s payment for your services is taxable.
5. American Opportunity Tax Credit
The American Opportunity tax credit is one of the best-known tax breaks for college expenses. The credit is worth up to $2,500 per eligible student (you, your spouse, or a dependent). Plus, up to 40% of the credit is refundable, which means that you can receive a tax refund for the refundable portion even if your pre-credit tax bill is less than the overall credit amount.
The credit has several restrictions and limitations, though. For example, it’s typically only available for undergraduate college students. That’s because the credit is only allowed if the student hasn’t completed the first four years of postsecondary education before the tax year started, and it’s only available for four tax years per eligible student.
The student must also be pursuing a degree or other recognized education credential, and be enrolled on at least a half-time basis for at least one academic period beginning during the tax year (or the first three months of the following year if the qualified expenses were paid during the tax year). A student who has been convicted of a felony for possessing or distributing a controlled substance can’t claim the credit, either.
You must also satisfy income limits to claim the American Opportunity tax credit. The credit is gradually reduced to zero if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 to $180,000 if you’re married filing jointly).
In addition, you can’t claim the credit at all if your filing status is married filing separately or you’re claimed as a dependent on someone else’s tax return.
Eligible expenses for purposes of the American Opportunity tax credit include tuition and certain expenses required for enrollment or attendance at an eligible educational institution, such as student activity fees or books, supplies, and equipment needed for class. They don’t include room and board, transportation costs, insurance, medical expenses (e.g., student health fees), living expenses, and the like.
The tax code also prevents “double dipping” for those who claim the credit. So, for instance, you can’t:
– Deduct the same higher education expenses used to claim the American Opportunity credit elsewhere on your tax return (e.g., as a business expense)
– Use the same expenses used to claim the American Opportunity credit to claim the Lifetime Learning credit (see below)
– Figure the tax-free portion of a distribution from a 529 plan or Coverdell ESA using the same expenses used to claim the American Opportunity credit
– Claim the American Opportunity credit using qualified education expenses paid with tax-free educational assistance (e.g., scholarships, grants, or assistance provided by an employer)
6. Lifetime Learning Credit
There’s another great education credit available for people who are actual students during the tax year—the Lifetime Learning credit. While the maximum credit amount ($2,000 per eligible student) isn’t as high and it isn’t refundable, the Lifetime Learning credit is available to many more people than the American Opportunity tax credit.
The Lifetime Learning credit can be claimed for qualified educational expenses for undergraduate, graduate, or professional degree courses—including courses to acquire or improve job skills. You don’t need to be pursuing a degree or other credential, though. You can also claim the credit for just one course, since there’s no half-time student requirement.
There’s also no limit on the number of years you can claim the Lifetime Learning credit, and you don’t have to claim the credit in any set number of consecutive years as you do with the American Opportunity credit. A felony drug conviction doesn’t prevent you from claiming the credit, either.
As with the American Opportunity tax credit, you can claim the credit for eligible expenses incurred by you, your spouse, or a dependent. The list of eligible expenses is basically the same for both the American Opportunity and Lifetime Learning credits (e.g., tuition and related expenses)—although the Lifetime Learning credit applies to a wider variety of classes and training.
The same income limits apply to both the American Opportunity and Lifetime Learning credits. Thus, the Lifetime Learning credit is gradually reduced to zero if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 to $180,000 if you’re married filing jointly).
Also, as with the American Opportunity tax credit, you can’t claim the Lifetime Learning credit if you use the married filing separately filing status on your tax return.
The same types of “double dipping” restrictions established for the American Opportunity tax credit also exist for the Lifetime Learning credit. Thus, you can’t:
– Deduct the same higher education expenses used to claim the Lifetime Learning tax credit elsewhere on your tax return (e.g., as a business expense)
– Use the same expenses used to claim the Lifetime Learning tax credit to claim the American Opportunity tax credit
– Figure the tax-free portion of a distribution from a 529 plan or Coverdell ESA using the same expenses used to claim the Lifetime Learning tax credit
– Claim the Lifetime Learning tax credit using qualified education expenses paid with tax-free educational assistance (e.g., scholarships, grants, or assistance provided by an employer)
Related: What’s Your Standard Deduction?
7. Series EE and I Savings Bonds
When you cash in a Series EE or I savings bond, you get your principal back, plus interest. The interest is usually taxed at the federal level, but generally not subject to state or local income tax. If you’re the bond holder, you can choose to pay the federal tax each year you earn interest, or wait to pay tax on all the interest when you cash in the bond.
But here’s where Series EE and I bonds make it to our list of education tax breaks: If the money is used for qualifying educational expenses, you won’t have to pay any tax on the interest, as long as all of the following requirements are satisfied:
– You were at least 24 years old when the bonds were issued.
– Your modified adjusted gross income is less than the cutoff amount for the year in which you claim the exclusion. (For 2023, the cutoff amount is $167,800 for joint filers and $106,850 for everyone else; $175,200 and $111,800, respectively, for 2024.)
– You cash in the savings bonds in the same tax year for which you claim the exclusion.
– You paid qualified higher education expenses to an eligible institution that same year.
– The expenses were for yourself, your spouse, or someone you list as a dependent on your federal income tax return.
– You don’t use the married filing separately filing status on your federal tax return.
For 2023, you’ll have to pay tax on part of the interest if your modified adjusted gross income is between $137,800 and $167,800 for joint filers ($145,200 to $175,200 for 2024), and between $91,850 and $106,850 for other people ($96,800 to $111,800 for 2024).
For this tax exemption, qualified expenses include:
– Tuition and fees required to enroll at or attend any college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs
– Contributions to a 529 plan
– Contributions to a Coverdell ESA
Room and board or expenses for courses involving sports, games, or hobbies that aren’t part of a degree or certificate-granting program don’t count.
WealthUp Tip: Since the bond holder must be at least 24 years old when a bond is issued to take advantage of this tax break, it doesn’t necessarily help younger adults who hold savings bonds to pay for college expenses. However, a parent can cash a bond and then put the money in a 529 plan or Coverdell ESA for their young child and avoid tax on the bond interest.
U.S. savings bonds are a pretty safe investment option. They’re also easy to purchase online at TreasuryDirect. You can also use IRS Form 8888 to purchase up to $5,000 of Series I bonds with a tax refund.
Related: What Tax Bracket Are You In?
8. Business Expense Deduction for Work-Related Education
A special business expense deduction is available for self-employed people, military reservists, certain artists, and certain government officials who spend their own money on work-related education. Taxpayers with a disability can also deduct impairment-related expenses (e.g., a sign language interpreter if you’re deaf) that are necessary to participate in a work-related education program as an itemized deduction.
To claim a deduction for work-related education, the education in question must satisfy one of the following requirements:
– It’s required to keep your present salary, status, or job, and serves a bona fide business purpose of your employer.
– It maintains or improves skills needed in your present work.
– Qualifying work-related education expenses can be deducted as a business expense even if the education could lead to a degree.
Even if the education meets one or both of the requirements above, it isn’t qualifying work-related education if at least one of the following is true:
– It’s needed to meet the minimum educational requirements of your present trade or business.
– It’s part of a program of study that will qualify you for a new trade or business.
If the education in question qualifies as work-related education, you can deduct:
– Tuition, books, supplies, lab fees, and similar items
– Related transportation and travel costs (but not expenses for travel, meals, or lodging while you’re away from home overnight)
– Other related expenses, such as costs of research and typing when writing a paper as part of an educational program
Personal expenses aren’t tax deductible. For example, you can’t deduct the dollar value of vacation time taken to attend a class. You also can’t deduct work-related education expenses if you benefit from these expenses under any other provision of the law, or the expenses are paid with tax-free scholarships, grants, or employer-provided educational assistance.
9. Employer-Provided Educational Assistance
Your employer might offer to help you further your education … or even pay off your student loan. The good news is that you don’t have to pay tax on up to $5,250 of educational assistance benefits you receive from your employer each year. (The benefits must be offered through a written educational assistance program.)
So, what types of educational benefits qualify for this tax exemption? Payments for tuition, fees, books, supplies, and equipment qualify. So do payments through 2025 by an employer for a worker’s student loan debt.
Any form of instruction or training that improves or develops your capabilities counts. The education doesn’t have to be work-related or part of a degree program, either.
The exclusion doesn’t apply to employer payments for:
– Meals, lodging, or transportation
– Tools or supplies (other than textbooks) that you can keep
– Courses involving sports, games, or hobbies unless they’re related to your employer’s business or are required as part of a degree program
You must pay tax on any employer-provided educational assistance over the $5,250 annual cap, unless it qualifies as a working condition fringe benefit (i.e., it could be deducted as a business expense if you paid for it). Any taxable amount will be added to your wages on your W-2 form.
10. Student Loan Interest Deduction
Millions of Americans end up taking out student loans to pay for college or graduate school. But now that the pandemic-related “pause” is over, those loans have to be paid back, with interest, in most cases. The required student loan payments can be a heavy financial burden that weighs you down for years. However, the good news is that the student loan interest deduction offers some tax relief.
The maximum deduction for student debt interest payments is $2,500 per year. However, for the 2023 tax year, the full deduction is gradually reduced to zero if your modified adjusted gross income is between $75,000 and $90,000 ($155,000 to $185,000 for married couples filing a joint return). You can’t claim the deduction if you use the married filing separately filing status or can be claimed as a dependent on someone else’s tax return for the year. For 2024, the phase-out range is $80,000 to $95,000 ($165,000 to $195,000 for joint filers).
To claim the deduction, the interest you pay must be on a qualified student loan. Qualified student loans are taken out solely to pay qualified educational expenses that were:
– For you, your spouse, or a person who was your dependent when you took out the loan
– Paid or incurred within a reasonable period of time before or after you took out the loan
– For education provided during an academic period for a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential
Loans from a relative or from a 401(k) plan don’t count.
For purposes of this deduction, qualified educational expenses include:
– Tuition and fees
– Room and board
– Books, supplies, and equipment
– Other necessary expenses (e.g., transportation)
The expenses must also be paid to a college, university, vocational school, or other post-secondary educational institution eligible to participate in federal student aid programs.
As with other education tax credits and deductions, you can’t “double dip.” So, for example, you can’t claim the deduction for any interest paid with earnings from a 529 plan if the earnings aren’t taxed because they’re used to pay student loan interest. The deduction also doesn’t apply to any interest paid by your employer before 2026 under an educational assistance program.
WealthUp Tip: If you’re the person legally obligated to make interest payments, but someone else (e.g., a parent) makes a payment on your behalf, you can still claim the student loan interest deduction. In this situation, it’s treated as if you received the payment from the other person and then paid the interest yourself.
11. Student Loan Forgiveness and Repayment Assistance
Normally, if a debt is canceled or paid for you, you must pay tax on the amount that was canceled or paid on your behalf. However, from 2021 through 2025, most people can exclude this amount from their taxable income if all or part of their student loan is forgiven. This includes private student loans that aren’t insured or guaranteed by the government.
In addition, canceled student loan debt generally isn’t taxed if it’s canceled because of a provision in the loan agreement requiring cancellation if you work for a certain period of time in certain professions for any of a broad class of employers.
If someone gives you money to pay off your student loan (instead of having your loan canceled), those payments are also excluded from your gross income if they’re received from either:
– The National Health Service Corps Loan Repayment Program
– A state education loan repayment program eligible for funds under the Public Health Service Act
– Any other state loan repayment or forgiveness that provides increased availability of health services in underserved or health professional shortage areas
Related: What Tax Bracket Are You In?
Perhaps the best way to lower your federal income tax bill is push yourself down into a lower tax bracket to reduce your tax rate. On the flip side, you certainly want to avoid getting kicked into a higher bracket and increasing your tax rate.
But, of course, under either scenario you need to have a good feel for where you are right now. For that purpose, check out the federal tax brackets and rates that will apply for your next federal tax return.
Related: What’s Your Standard Deduction?
For most people, their largest and most important tax deduction is the standard deduction. However, the standard deduction amounts change every year to account for inflation. Plus, the standard deduction isn’t the same for everyone.
So, before start your tax return or jumping into tax planning mode, you’ll need to know how much your standard will be for the tax year.
Related: Capital Gains Tax: What You Need to Know
Millions of Americans sell stocks, bonds, cryptocurrency, real estate, precious metals, and other types of investment property every year. However, if you sell investments during the year, you might owe capital gains tax on any profits.
The good news is that you’ll pay a lower tax rate on capital gains when compared to income taxes on wages, tips, and other “ordinary” income. On the other hand, there are a few landmines to avoid when you sell investment property. Get all the details with our guide to the capital gains tax.