12 Education Tax Credits and Deductions to Know

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is an education tax credit available to people who are currently enrolled in college courses. The credit is partially refundable, meaning it is possible to receive part of the total credit as a tax refund.  

•  Eligible taxpayers (student, parent or spouse) can claim the credit for 100% of the first $2,000 spent on qualified education expenses (such as tuition, fees and textbooks). 
•  Eligible taxpayers can claim 25% of the next $2,000. 
•  The total credit is worth up to $2,500 for each qualifying student. 
•  If the credit amount exceeds the tax you owe for the year, you'll get a refund for 40% of the remaining amount, up to $1,000, for each qualifying student. 

You can only claim qualified expenses for the AOTC. These include tuition and certain related expenses required for enrollment or attendance at the student's college (for example, necessary fees, books, supplies, and equipment). 

What expenses do not qualify? Amounts paid for insurance, medical expenses (including student health fees), room and board, transportation, and living or family expenses do not qualify. 

For more information, see: The American Opportunity Tax Credit (AOTC): How Much Is It Worth?

Lifetime Learning Credit

Another tax credit for people currently enrolled in college is the Lifetime Learning Credit (LLC). This credit is worth up to $2,000 per tax return. Unlike the American Opportunity Tax Credit (AOTC), eligible graduate students can claim the credit. And students don't need to attend at least half-time to claim the credit, either.

•  This education credit can be claimed for an unlimited number of years. However, the Lifetime Learning credit is not refundable.  
•  This means it can lower your tax bill to zero, but you won't receive any portion of the credit as a tax refund. 
•  Income guidelines for the Lifetime Learning Credit are the same as those for the AOTC. 

Note: Just like with the AOTC, the IRS says you cannot claim expenses you use to calculate the Lifetime Learning credit anywhere else on your tax return. 

Tax breaks for scholarships and other assistance

A scholarship, fellowship, or grant may be excluded from taxable income if you're pursuing a degree at an eligible educational institution. Education assistance is only tax-free if the funds are used to pay for qualified education expenses.

What are Qualified Education Expenses?

•  Tuition or fees that are required for enrollment or attendance.
•  Books, supplies, equipment, or other expenses that are required by the learning institution for a class.  

To be considered tax-free, scholarships can't exceed your education expenses or be used to pay for expenses such as room and board or travel.

What about VA education benefits? Payments to veterans for education under any law administered by the Department of Veterans Affairs are tax-free. However, if you qualify for other education tax benefits in addition to military benefits, you may have to reduce the amount of education expenses that you claim.

Qualified Tuition Reduction: If your tuition is reduced because you or a relative work for a college, you might not have to pay tax on the discount. 

For graduate courses, only students who perform teaching or research activities for the educational institution can receive tax-free tuition reductions.

Related: Are Scholarships Tax-Free or Taxable?

Tax deduction for student loan interest

In some cases, you can take an education tax deduction for the interest you paid on your student loans. You can claim this deduction as an adjustment to your income,  so you don’t need to itemize. (Most people take the standard deduction.)

You can only deduct up to $2,500 of student loan interest paid each year. However, how much you can deduct depends on your modified AGI.

To deduct student loan interest, you must have taken out the loan solely to pay qualified education expenses for you, your spouse, or a person who was your dependent at the time you took out the loan. 

Married couples filing separate returns cannot claim the student loan interest deduction. You're also disqualified if someone else (such as a parent or guardian) claims you as a dependent on their tax return.

If you paid $600 or more of interest on a qualified student loan during the taxable year, you should receive a Form 1098-E, Student Loan Interest Statement.

Related: How to Claim the Student Loan Interest Tax Deduction

Education tax break: 529 plans

A 529 plan is a tax-advantaged savings account operated by a state or educational institution that can be used to help you pay educational expenses like college, post-secondary training, school tuition, or student loans. They can even be used to pay for K-12 education for a child or grandchild. 

The rules for 529 savings plans don't always limit qualifying education expenses to college tuition or books. Parents and guardians may be able to use the savings to pay for other types of education. For example:

•  You may use up to $10,000 for private K-12 education.
•  You may use your 529 savings plan to pay for trade school. 
•  You may change the beneficiary of the 529 savings plan if needed (transfer the plan to another individual). 

What if my child doesn't go to college? Starting in 2024, up to $35,000 (lifetime limit) can, under a provision in the SECURE 2.0 Act,  be rolled over from a 529 plan to a Roth IRA. So, your child or grandchild might be able to eventually benefit from your 529 contributions, even if they don't use the funds for education. However, there are rules governing these 529-to-Roth rollovers, one of which is that you had to have a 529 plan for at least 15 years. There are also specific plan beneficiary requirements.

Overall, rules and benefits for 529 plans vary by state and are based on the 529 savings plan you choose, so it is always important to do your research to see which plan best aligns with your family’s needs.

Related: The 529 Grandparent Loophole for College Savings 

Education tax break: Coverdell Education Savings Accounts (ESAs)

Another way to save for college is through a Coverdell Education Savings Account (ESA). Like 529 plans, money deposited in a Coverdell ESA grows tax free, and there's no tax on distributions used for qualified college expenses. Additionally, you may choose your own investments with a Coverdell savings account. However, unlike 529 plans, the tax code places limits on who can contribute to a Coverdell ESA.

•  Single people can contribute to a Coverdell ESA only if they have a modified adjusted gross income (MAGI) of $110,000 or less. 
•  Married couples filing a joint return can't have a modified AGI of more than $220,000. 

 (Modified AGI is equal to your federal AGI, plus any foreign earned income exclusion and/or housing exclusion, foreign housing deduction, and excluded income from Puerto Rico or American Samoa.) 

 There are other limits for Coverdell Education Savings Accounts. 

•  The maximum contribution limit for 2025 is $2,000 per child. 
•  You can only contribute to a Coverdell ESA until your child is 18 (unless your child has special needs). 
•  Amounts remaining in a Coverdell ESA must be distributed within 30 days after the beneficiary's 30th birthday (unless the beneficiary has special needs). 

Employer-provided educational assistance

While not an education tax credit, employer-provided education assistance can sometimes result in a tax break. Workers who receive educational assistance benefits from their employer can exclude up to $5,250 of those benefits from their taxable income each year. 

Employee educational assistance benefits must be paid under a written educational assistance program.

However, payments for the following items are not considered tax-exempt as part of employee education assistance.

•  Meals, lodging or transportation
•  Tools or supplies (other than textbooks) that you can keep 
•  Courses involving sports, games or hobbies (unless they have a reasonable relationship to the employer's business or are required as part of a degree program) 

 Related: A Little-Known Tax-Free Way to Help Pay Your Student Loan 

Education tax deduction for the self-employed

There are a number of self-employment tax deductions. For example, self-employed people generally can deduct the cost of work-related education as a business expense. This reduces the amount of income subject to both the federal income tax and self-employment tax. 

To qualify as a business deduction, the education must meet one of the following conditions:

•  Be required to keep your present salary, status, or job.
•  Taken to maintain or improve skills needed in your present work. 

Even if your education meets the above qualifications, the IRS says you won't be able to claim education expenses as business deductions if any of the following apply:

•  The education is needed to meet the minimum qualifications of your trade or business.
•  The education is part of a program that would qualify you for a new trade.

What expenses aren't deductible?  You cannot deduct the dollar value of vacation time or annual leave taken to attend classes. 

If you used funds from a tax-free scholarship, grant, or employer-provided educational assistance to cover the cost of education expenses, you cannot deduct those costs as a business expense.

You also cannot deduct education expenses if you used the expenses to calculate another credit (like the AOTC or Lifetime Learning Credit).

Early distributions from IRAs

Individual retirement accounts (IRAs) are meant to be used in retirement. You generally have to pay a 10% tax if you take money out of an IRA before you reach age 59½ .

However, it's possible to withdraw funds from an IRA to pay for qualified higher education expenses without having to pay the 10% tax penalty. 

For the 10% penalty tax to be waived, early distributions should be taken in the same year that expenses are paid. Additionally, education expenses must be for one of the following people:

• Yourself 
• Your spouse
• Your or your spouse's child, foster child, or adopted child
• Your or your spouse's grandchild

Many types of education expenses qualify to avoid the 10% penalty. According to the IRS, you can use early distributions to pay for the following qualified education expenses:

• Tuition and fees 
• Books, supplies, and equipment for enrollment or attendance
• Room and board for students attending at least half-time
• For students with special needs, expenses for any special services incurred in connection with the student's enrollment or attendance also qualify

 Distributions that exceed the dollar amount of qualified education expenses are subject to the 10% penalty.

Note: You will still need to pay income tax on the amount withdrawn from IRAs, even if the distributions are used to pay for qualified education expenses.

Education savings bond program

You might be able to cash in savings bonds without paying tax on the interest earned. To avoid paying tax on interest earnings, you can use the earnings to pay qualified education expenses for yourself, your spouse, or a dependent.

The savings bonds must be series EE bonds issued after 1989 or series I bonds. The bonds must also be issued either in your name (as the sole owner) or in the name of you and your spouse (as co-owners). Additionally, the owner must be at least 24 years old before the bond's issue date.

If you want to avoid paying federal income tax on interest from these savings bonds, you must use the earnings to pay for qualified education expenses.

Some qualifying education expenses include tuition, books, and equipment and supplies.

Qualifying expenses must be paid to a school that is eligible to participate in federal student aid programs. The expenses should also be paid in the same year that savings bonds are redeemed.

You also need to have income that does not exceed the income threshold the IRS sets each year. You will claim your exclusion of interest from series EE and I savings bonds on Form 8815.

Education tax breaks for student loan forgiveness

While federal student loan payments have resumed, some graduates might have student loans forgiven through other programs. So, it's good to know whether your forgiven student loan amounts are taxable or tax-free.

If you have had $600 or more of your student loans forgiven, the forgiven amount could be considered taxable income. However, discharged loan amounts resulting from certain student loan forgiveness and repayment assistance programs are tax-free. 

You may not need to pay income tax on amounts forgiven through the public service loan forgiveness or other assistance programs that are listed below.

• Teacher loan forgiveness 
• Law School repayment assistance
• National Health Service Corps Loan Repayment Program (The 2025 application cycle will open soon)

401(k) student loan match

The IRS released new guidance on how some with student loans may be able to receive a retirement match from their employer for every student loan payment made. 

Those with student debt who work for a participating employer with a 401(k) plan, 403(b) plan, governmental 457(b) plan, or SIMPLE IRA can participate in the retirement match.

To qualify, you must be making "Qualified Student Loan Payments (QSLPs)." You should be prepared to provide your employer with QSLP information including:

• The amount and date of the loan payment
• Confirmation that you made the payment (and not your friend, for example)
• Confirmation that the loan is a qualified student loan and was used to pay for qualified higher education expenses for yourself, your spouse, or your dependent
• Confirmation that you incurred the loan

Note: Keep in mind that employers don't have to participate in the match. They may also require you to opt in, as well. For more information, see New IRS Rules for 401(k) Student Loan Match.