The ABCs of Higher Education Tax Breaks

Last updated on October 19th, 2020

Nationwide, students shoulder the burden of ever-increasing higher education costs. Fortunately, the Federal Government offers several tax breaks to defray those expenses. Here are the tax breaks available to current higher education students.

The American Opportunity Tax Credit

This tax break offers up to $2,500 per year, per student. Up to 40% of the credit is refundable. The AOTC can only be used for the first four years of a student’s post-secondary education. Students must be working toward a degree or credential at a qualifying institution, for at least half-time attendance.

Lifetime Learning Credit

Families who have spent up to $10,000 in qualifying higher education expenses may qualify for the LLC, which offers a $2,000 credit. Students don’t need to be enrolled for a minimum period. The LLC can be used for all phases of education – even adult and continuing education classes.


The Student Loan Interest Deduction allows you to deduct up to $2,500 per year of interest paid on a student loan. The loan must have been disbursed within 90 days of the start of an academic period. This deduction will be available to claim as long as you’re paying interest on a student loan.

If you use the Tuition and Fees Deduction, you can deduct up to $4,000 in expenses including tuition and fees, books, supplies, and equipment.

IRA Withdrawals

If you withdraw IRA funds to pay for educational expenses, the 10% early withdrawal penalty will be waived. Qualifying expenses include tuition and fees, books, supplies and equipment, room and board for at least half-time attendance.

College savings plan

For those looking to set aside money, savings plans offer a way to make contributions that are non-deductible and grow tax-free. A Qualified Tuition Program (QTP) allows you to contribute between $100,000 and $350,000 depending on the state program. Certain states have prepaid tuition plans, so you can lock in tuition at today’s rates for a state college. You can also invest your contributions in a 529 Savings Plan, where you can choose from mutual funds, annuities, and CDs.

The other type of savings plan is an Education Savings Account (ESA), which has a limit of $2,000 nondeductible contributions per child.

Savings bond interest exclusion

This option permits you to exclude from gross income all or part of the interest paid upon redeeming an eligible Series EE and I Bond issued after 1989. The exclusion works for tuition and fees, or contributions to QTPs and ESAs.

Trying to decide which tax incentive will benefit you most? At RBT CPAs, LLP, we can help you navigate these options, find the best fit for your family, and make sure you are receiving all the benefits you’re entitled to.