Navigating College Costs: Understanding Tuition, Fees, and Tax Benefits

College represents a significant financial undertaking for many families. Fortunately, the tax system offers several avenues to potentially alleviate some of these costs through credits and deductions. Understanding these options, including eligibility requirements and necessary documentation, is crucial for maximizing tax benefits.

Shifting Landscape of Education Tax Benefits

Recent tax law changes have altered the landscape of deductible college expenses and available credits. It's essential to stay informed about these changes to accurately file taxes and claim applicable benefits.

The End of the Tuition and Fees Deduction

A notable change is the discontinuation of the qualified tuition and fees deduction after 2020. Taxpayers could previously reduce their taxable income by up to $4,000 for qualified tuition expenses. To be eligible, taxpayers had to cover the cost of qualified education expenses for a college student, their dependent (provided no one else claimed the dependent on their taxes), or their spouse. Qualified expenses encompassed tuition and mandatory fees required for enrollment at an institution. However, expenses paid via scholarships or other tax-free awards were not deductible.

This deduction was unavailable to those filing separate tax returns or those considered nonresident aliens for any part of the tax year. Income limitations also applied: the deduction was not accessible if modified adjusted gross income (MAGI) surpassed $80,000 for single filers or $160,000 for joint filers. It was, however, an above-the-line deduction, meaning that taxpayers did not have to itemize.

Work-Related Education Expenses

For employees, work-related education expenses are not tax deductible from 2018 through 2025, due to changes in itemized deductions from tax reform. Before this change, a deduction could be claimed if the education was required by an employer or by law. Self-employed individuals, however, may still be able to deduct education expenses. The education is required by your employer or the law to keep your present salary, status or job. Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work.

Key Tax Benefits Still Available

Despite the elimination of certain deductions, several valuable tax benefits remain available to help offset college costs.

Student Loan Interest Deduction

The student loan interest deduction remains a significant benefit, allowing taxpayers to reduce their taxable income by up to $2,500 for qualified student loan interest paid during the year. To qualify, the loan must have been used solely for education expenses.

Several requirements must be met:

The student must be the taxpayer, their spouse, or their dependent.
The student must have been enrolled at least half-time at an eligible institution.
The program must lead to a degree, certificate, or other recognized credential.
The loan cannot be from a related person or a qualified employer plan.

Education Tax Credits: American Opportunity Credit (AOTC) and Lifetime Learning Credit (LLC)

While direct deductions for tuition and fees may be limited, eligible taxpayers can still claim education credits like the American Opportunity Credit (AOTC) or the Lifetime Learning Credit (LLC). You can't take more than one education benefit for the same student and the same expenses. You cannot claim a credit for education expenses paid with tax-free funds.

American Opportunity Credit (AOTC)

The AOTC allows eligible taxpayers to claim a credit for qualified education expenses paid for a student's first four years of higher education. In addition to tuition and mandatory fees, this may include expenses for books, supplies, and equipment (including computers if required as a condition of enrollment), even if these items are not purchased directly from the school.

Read also: Affording ECU

Independent students and parents can qualify for the AOTC if they pay for qualified education expenses used for undergraduate courses. However, the amount you’re allowed to claim depends on your modified adjusted gross income (MAGI). For the 2026 tax year, to get the full $2,500 credit, your MAGI cannot be higher than $80,000 (or over $160,000 for joint filers). These limits were the same during the 2025 tax year.

Up to 40% of the AOTC amount is refundable. In this case, the parent does not get to claim the student as a dependent and therefore will miss out on any child or dependent credit.

Lifetime Learning Credit (LLC)

The LLC, on the other hand, is a nonrefundable tax credit. This means that you can’t get a refund if the credit lowers your tax liability to an amount below zero. In which case, you would likely choose the AOTC, if possible. The LLC, however, proves useful for parents and students who can claim the credit if they’re paying for an undergraduate education, graduate school or technical school. Plus, there’s no rule saying that it can only be claimed for a certain number of years.

To get the full $2,000 LLC in 2026, your MAGI can’t be higher than $80,000 if you’re single or $160,000 if you’re filing a joint tax return, and the phase-out goes to $90,000 and $180,000, respectively. These limits also remain the same from previous years. You’re ineligible for the tax credit if your filing status is married filing separately, you were a nonresident alien at some point during the year, or someone else is claiming you (or the student you paid for) as a dependent.

With qualified tuition and fees, you can count costs for course-related books, supplies, and equipment (including computers) required to be paid to the educational institution.

Read also: Withdrawals for College: A Guide

To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

Qualified Education Expenses

Qualified education expenses are tuition, fees and other related expenses paid for an eligible student to enroll or attend an eligible educational institution. Eligible expenses also include the payment of student activity fees required to enroll or attend the school.

For the American Opportunity Credit: Expenses paid for books, supplies, and equipment the student needs for a course of study are considered qualified education expenses, even if it is not paid to the school.

You must pay the qualified education expenses for an academic period that starts during the tax year or the first three months of the next tax year. Academic periods can be semesters, trimesters, quarters, or any other period of study such as a summer school session. The school determines academic periods.

Expenses That Don't Qualify

The Internal Revenue Service has rules for what you can and cannot deduct as a qualified expense. In general, insurance, medical expenses, transportation, and living expenses are not qualified school expenses for an education credit.

State-Specific Tuition Programs and Deductions

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses.

As a result of advocacy by WCRIS, state law allows Wisconsin parents to deduct private school tuition on their taxes. It’s important to remember that this is tax deduction, not a tax credit. In order to claim the deduction, parents must file the current tax year’s Wisconsin Department of Revenue Schedule PS form, which is posted on the right and also in the Parent Packet. The deduction can only be used for tuition paid out by the parent or guardian. Fees for extracurricular activities, uniforms, school supplies, meals, transportation, etc.

Massachusetts allows a deduction for tuition payments paid by taxpayers for themselves, and their dependents who attend a qualifying two or four-year college leading to an undergraduate or associates degree, diploma, or certificate. To qualify as a dependent for purposes of this deduction, the individual must be a “dependent” as defined by Internal Revenue Code (“Code”) § 151(c) as in effect on January 1, 2024.

The deduction is equal to the amount by which the tuition payments, less any scholarships, grants, or financial aid received, exceed 25% of the taxpayer's Massachusetts adjusted gross income.

Tuition payments for students pursuing graduate degrees are not eligible for the college tuition deduction.

Qualified college tuition expenses include only those expenses designated as tuition or mandatory fees required for the enrollment or attendance of the taxpayer or any dependent of the taxpayer at an eligible educational institution.

No deduction is allowed for the following:

Room and board
Books
Supplies
Equipment
Personal living expenses
Meals
Lodging
Travel or research
Athletic fees
Insurance expenses
Other expenses unrelated to an individual's academic course of instruction.

Qualification for College Tuition Deduction is determined by completing the following worksheets / Schedules:

For residents:

The Massachusetts AGI Worksheet (Form 1 instructions) and
The College Tuition Deduction Worksheet (Form 1, Schedule Y instructions)

Non-residents and part year residents are ineligible for the college tuition deduction.

Massachusetts allows two student loan interest deductions for interest paid on a qualified education loan:

The federal deduction under § 221 for both graduate and undergraduate student loan interest paid (Reported on Schedule Y, which has a maximum amount allowed)
The Massachusetts deduction for interest paid on a qualified undergraduate student loan (Reported on Schedule Y, which is unlimited)

A taxpayer may not claim both deductions for the same interest payments.

Federal Student Loan Interest Deduction

Massachusetts adopts the federal deduction for student loan interest under Code § 221 in effect on January 1, 2024. Any federal changes to this deduction after January 1, 2024 will not be automatically adopted.

The deduction is allowed for interest paid by the taxpayer, up to an annual maximum of $2,500, on a qualified education loan for undergraduate or graduate education, subject to taxpayer income limitations.

The amount of the deduction depends on:

Filing status and
Federal modified adjusted gross income (MAGI)

In tax year 2023, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with federal MAGI in excess of $75,000 ($154,000 for joint returns) and is completely phased out for taxpayers with federal MAGI of $90,000 or more ($185,000 or more for joint returns). See IRS Rev. Proc. 2022-38. In tax year 2024, the deduction begins to phase out for taxpayers with federal MAGI in excess of $80,000 ($195,000 for joint returns) and is completely phased out for taxpayers with federal MAGI of $95,000 or more ($195,000 or more for joint returns). See IRS Rev. Proc.

In tax year 2022 and thereafter, Massachusetts excludes from gross income such income that is attributable to the forgiveness of certain student loans pursuant to G.L. 62, § 2(a)(2)(R). Massachusetts also conforms to the federal exclusion of forgiven student loans under Code § 108(f)(5) in effect for the taxable year, which is set to expire after tax year 2025.

College Savings Plans: 529 Plans and Coverdell ESAs

529 plans and Coverdell Education Savings Accounts (ESAs) represent valuable tools for saving for future education expenses.

529 Plans (QTP)

You can't deduct either payments or contributions to a QTP. No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Qualified expenses include required tuition and fees, books, supplies and equipment including computer or peripheral equipment, computer software and internet access and related services if used primarily by the student enrolled at an eligible education institution.

Coverdell ESAs

A Coverdell ESA can be used to pay either qualified higher education expenses or qualified elementary and secondary education expenses. Income limits apply to contributors, and the total contributions for the beneficiary of this account can't be more than $2,000 in any year, no matter how many accounts have been established. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax.

Scholarships and Fellowships

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them.

Maximizing Tax Benefits: A Proactive Approach

To make the most of available tax benefits, consider the following:

Gather Financial Documents Early: Collect W-2 forms, 1099 forms, investment income information, last year’s tax refund details, student loan interest statements, and other relevant documents.
Educate Yourself: Stay informed about current tax laws and regulations related to education expenses.
Seek Professional Advice: A financial advisor can provide personalized guidance on tax strategies, college savings accounts, and determining eligibility for deductions and credits.

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