You probably already know that federal grants and loans can play an important role in making higher education more affordable. What you may not know is that the tax code also helps many people pay for college by encouraging savings, providing tax benefits while students are in school, and allowing tax deductions for some student loan interest payments. We reported on tax expenditures and federal student assistance, and found that improved tax information could help students and families pay for college.
For the tax benefits available while students are in school, some students and families do not claim anything even though they are eligible, while others choose a credit or deduction that does not maximize their benefit. We found that one in seven eligible taxpayers did not claim an average of $466 in education-related tax benefits for which they appeared eligible in 2009. Other eligible taxpayers chose a credit or deduction that did not maximize their tax benefit.
Knowing your tax options can help keep you from leaving money on the table. These options may include:
- Tax-preferred savings vehicles, like 529 College Savings Plans, allow tax filers to save for higher education costs tax-free. Most states also provide annual tax benefits on contributions to these plans.
- Tax credits, such as the American Opportunity Credit or the Lifetime Learning Credit, reduce tax filers’ income tax liability on a dollar-for-dollar basis for qualified educational expenses.
- Tax deductions permit tax filers to subtract qualified educational expenses—like tuition and fee payments—from taxable income.
- Tax exemptions allow parents to deduct a certain amount from their gross income for each dependent between the ages of 19 and 23 who is a full-time student.
You can learn more about by listening to our podcast on assistance for families paying for college. You may also be interested in this resource from IRS, Tax Benefits for Education: Information Center.