You, a dependent, or a spouse may be heading off to college for the fall. With the cost of college rising higher all the time, tax breaks exist to ease this financial burden.

Back-To-School Time is a good time to review the fundamentals of tax breaks for college costs.

Tax Credits

There are two tax credits to claim to offset qualified college education costs.

The American Opportunity Tax Credit [AOTC] is worth up to $2,500 per student for each of the first four years of college. There are enrollment hours, enrollment length and income restrictions.

The Lifetime Learning Credit [LLC] offers a scaled-down but still worthwhile tax break if you are ineligible for the AOTC.  It is worth up to $2,000 for 20% of the first $10,000 in tuition costs.

You can claim only one type of college credit per student on your tax return per year. If you are eligible for both, choose whichever one provides you the greater benefit.  You can also claim a different credit for each student. i.e.  the AOTC for one student and the LLC for the other.


Above-The-Line Tuition and Fees Deduction

The Tuition and Fees Deduction is worth up to $4,000 per tax return per year.  Income limits apply. It is treated as an income adjustment directly on the first page of Form 1040 and is commonly referred to as an ‘above-the line deduction’.

Only money spent on tuition, fees and books (but not room and board) count towards either the AOTC or LLC credits or the Tuition and Fees Deduction. You also cannot double dip in the tax break pool. You can’t claim the Tuition and Fees Deduction if you also take the LLC or the AOTC for the same student in the same tax year.


Savings Bonds

Federal Savings Bonds can be redeemed to pay college costs. You do not have to pay taxes on the interest earned. The money must be used to pay qualified education expenses (tuition, fees and books but not room and board). Income limits apply.


529 Savings Plans

529 Savings Plans are worth up to $8,000 per taxpayer on a Missouri state return ($16,000 on a joint return). The money can be withdrawn tax-free for qualified higher education expenses (QHEE) including room and board. The fact that room and board costs are a QHEE makes the 529 plan very attractive.

529 Savings Plans are a very easy hands-off way to save for college. Simply complete a plan enrollment form and make contributions to the plan (including automatic deposits).  The earnings grow tax-free.  As a type of savings plan, it is a better tool for long term planning, say 5-10 years out.


Once again, you can’t be double dipping multiple tax breaks.   An expenditure may qualify for the AOTC, the LLC, a savings bond redemption, or a 529 plan withdrawal. If an expenditure qualifies for more than one of these, you choose the one that provides the most value—but you don’t get them ALL.


You can take advantage of many these tax breaks whether you are sending someone to college or paying your own way. But these tax breaks may provide a different benefit for one versus another.

It also may make a difference if a student is treated as a dependent or not. Financial aid may have an impact on these tax breaks as well.

This article just touches the surface on the subject of easing the financial burden of college costs. For example, the impact of tax-free scholarships and the student loan deduction certainly is a consideration.

As one can start to see, the rules for tax breaks for college costs are complicated.  DIY (Do It Yourself) software can’t really always handle the computations to determine the best tax option. In the author’s view, old-fashioned pencil and paper is the easiest way to determine which option to take.

Do yourself a favor and get in the loop with a tax accountant who understands the fundamentals of tax breaks for college costs and how to optimize for the best benefit.

John J. Kasperek, EA has been helping people get the tax breaks that makes the most sense for his/her college needs for almost thirty years.