Easing the Financial Burden of College: Tax Benefits for Students and Parents

College costs continue to rise every year, making it more challenging for students and their families to afford. For the 2021-2022 academic year, the average cost of tuition, fees, room, and board for an in-state student at a four-year public institution was $27,650. A decade ago, the average cost was $15,180 (in 2016 dollars), based on the released report by Education Data Initiative on October 22, 2022.

Tax breaks can help offset these costs, and a financial advisor can help create a tax strategy that meets your education goals. One tax break that has expired is the Tuition and Fees Deduction, which allowed taxpayers to claim a maximum deduction of $4,000 for qualified tuition and fees in 2018, 2019, and 2020. However, the loss of this deduction highlights the benefits of a 529 college savings plan.

The Tuition and Fees Deduction is one of three tax credits for students, the others being the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC). AOTC offers up to $2,500 tax credit for four years, refundable if reduces tax liability to zero. LLC offers non-refundable tax credit of up to $2,000 for tuition and other education expenses. Both credits’ eligibility is determined by modified adjusted gross income (MAGI), as reported by Smart Asset on January 16, 2023.

Graduates and their parents can also benefit from the Student Loan Interest Deduction, which is worth up to $2,500 and is based on the amount of interest paid on a qualified student loan in 2021. To qualify, you must meet certain criteria, including filing status, MAGI, and dependent status. The IRS provides a worksheet to calculate the exact deduction.