Is There a Tax Break for Paying Your Child’s College Tuition?

Covering the cost of a child’s college tuition can be a significant financial burden. However, several tax breaks can help you reduce your overall tax liability. These include credits, deductions and tax-advantaged savings accounts, which could offset some expenses associated with higher education. Working with a financial advisor can also help you identify other tax benefits and create a plan fund to your child’s education.

Tax Breaks for College Tuition

Tax breaks for college tuition include can reduce the amount of tax you owe based on the costs of higher education. These benefits work by either directly reducing your taxable income or by offering credits to reduce the tax you owe dollar-for-dollar. Here are three to keep in mind.

American Opportunity Tax Credit

The American Opportunity Tax Credit provides $2,500 per eligible student during the first four years of higher education. This credit covers 100% of the first $2,000 in qualified expenses and 25% of the next $2,000. Up to $1,000 of the credit is refundable, so families with little or no tax liability can receive a portion as a refund.

To qualify for the AOTC, the student must be enrolled at least half-time in a degree or certificate program. Their parents’ modified adjusted gross income (MAGI) must also be below the annual income limits set by the IRS. The credit begins to phase out for single filers earning over $80,000 ($160,000 for married couples filing jointly).

How to claim the AOTC:

• The 1098-T form provided by the college will list tuition payments and expenses.
• Taxpayers must fill out Form 8863 and attach it to their federal tax return.
• Keep records of tuition payments and related expenses to substantiate the claim.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) offers a tax credit of up to $2,000 for qualified tuition and education-related expenses. Unlike the AOTC, the LLC is available for an unlimited number of years.

The LLC covers 20% of the first $10,000 in eligible expenses, meaning the maximum credit per return is $2,000. The credit is non-refundable, so it can only reduce tax liability to zero but will not result in a refund.

How to claim the LLC:

• Obtain Form 1098-T from the educational institution.
• Complete Form 8863 and attach it to the tax return.
• Verify income limits — single filers earning over $90,000 ($180,000 for married couples) do not qualify.

Coverdell Education Savings Account (ESA)

A Coverdell ESA allows tax-free withdrawals for qualified education expenses up to $2,000 per year per beneficiary. While contributions are not tax-deductible, investment earnings grow tax-free.

How to claim Coverdell ESA benefits:

• Withdraw funds for qualified education expenses, including tuition, fees and books.
• Report distributions on the tax return if necessary, using IRS Form 1099-Q.

Tax Deductions for College Tuition

While tax credits reduce the total tax bill, tax deductions lower the amount of taxable income, which can indirectly reduce tax liability. Parents may be able to deduct up to $2,500 in interest paid on student loans each year. This deduction applies even if the parent is not the student, as long as they are legally responsible for the loan.

The deduction is available to taxpayers with a MAGI below $85,000 ($175,000 for married filers).

How to claim the deduction:

• Use Form 1098-E, issued by the loan provider, to report interest paid.
• Enter the deduction on Schedule 1 of the tax return.

529 Plans, Another Way to Pay for College Tuition

A 529 Plan is a tax-advantaged savings plan designed to help families set aside funds for education expenses. Contributions grow tax-free, and withdrawals remain tax-free if used for qualified education costs. Many states offer tax deductions or credits for contributions to a 529 plan, providing additional tax benefits.

Funds in a 529 plan can be used for tuition, fees, books and even room and board. Some plans allow up to $10,000 per year to be used for K-12 tuition, expanding their flexibility. Unlike other tax breaks, there are no income limits on contributions, making them accessible to all families.

Bottom Line

Parents paying for a child’s college education have multiple tax benefits available to help reduce the financial burden. Tax credits like the AOTC and LLC provide direct reductions in tax liability. Deductions such as the Student Loan Interest Deduction lower taxable income. And tax-advantaged accounts like 529 Plans offer a strategic way to save for future education expenses while enjoying potential state tax benefits. Working with a tax consultant can provide further insights into how parents can qualify for, and receive, tax breaks for paying for a child’s college.

Tax Planning Tips

• A financial advisor can help you create a plan to manage your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you have leftover 529 funds, you may be able to roll the money over into a into a Roth IRA. Here are the pros and cons.

Photo credit: ©iStock.com/fotostorm, ©iStock.com/eclipse_images, ©iStock.com/demaerre