TAX BREAKS FOR HIGHER EDUCATION
Introduction
Expenses for higher education offer taxpayers many ways to reduce their income taxes. This can
provide some relief from the high cost of college, graduate school, and other higher education
courses. Careful planning before the expenses are incurred will assure that you receive the full
benefit of these complicated tax breaks.
If you discover that you were eligible for a tax break but failed to claim it, you can file an
amended tax return for up to three years from the date you filed the original return or two years
after the date you paid the tax, whichever is later.
Legislation has added tax breaks and modified existing ones in recent years. The 2010 Tax
Relief/Job Creation Act extended the more lenient rules for many tax breaks that were set to
expire at the end of 2010. Those rules will now expire at the end of 2012, unless additional
legislation is passed. This fact sheet explains the rules in effect for 2011 and 2012, and lists the
rules that will go into effect on January 1, 2013 unless another extension is passed.
This fact sheet focuses on the tax aspects of the various credits, deductions, and other tax breaks
available for higher education expenses. You will need to also weigh other advantages or
disadvantages in choosing the tax breaks you will use.
How to Use This Fact Sheet
This fact sheet is intended to help you obtain the greatest tax benefits from expenses for higher
education. The following descriptions of the sections in this fact sheet will help you find the
information you need.
Highlights of Tax Breaks
Read this section for a brief overview of nine different tax breaks that are currently
available.
Benefits, Requirements and Limitations of Specific Tax Breaks
Use this section to check all the details about the tax breaks for which you may be
eligible. Is there an income limit on who can use the tax break? Do the classes have to be
part of a degree program? Are books and other expenses covered?
University of Illinois  U.S. Department of Agriculture  Local Extension Councils Cooperating
University of Illinois Extension provides equal opportunities in programs and employment.
2 Tax Breaks for Higher Education
Separate tables cover each of these topics:






Tax Breaks: Basic Characteristics
Whose Expenses Are Eligible?
What Expenses are Allowable?
Requirements for Student and Institution
Type of Education Program Covered
Additional Restrictions on Claiming Tax Breaks
Explanation of Terms
Many terms used in this fact sheet have very specific definitions. For other terms, the
definition varies from one tax break to another. Check this section for definitions and
explanations.
Claiming and Combining Tax Breaks
See how using one tax break affects eligibility for others so you can plan to maximize the
benefits you get.
Tips on Ways to Make the Most of Tax Breaks
Use these suggestions to help you put this knowledge to work.
Highlights of Tax Breaks
Coverdell Education Savings Account
(ESA, formerly known as Education
IRA)
This trust or custodial account is created
exclusively for the purpose of paying the
beneficiary's qualified higher education
expenses and, through 2012, expenses for
grades K-12 at public or private schools.
The annual contribution limit is $2000 per
beneficiary ($500 beginning in 2013).
Contributions are not deductible.
Contributions must be made by the
beneficiary's 18th birthday. Special needs
students are exempt from the age limit
through 2012. Individuals and, through
2012, entities such as corporations and
nonprofits can make contributions.
Distributions for qualified education
expenses are tax-free. Qualified expenses do
not include classes merely to improve or
acquire skills. Any amounts withdrawn that
are not used for qualified expenses or that
are in excess of qualified expenses are taxed
and subject to a 10% penalty tax. When the
beneficiary reaches age 30, any money left
will be taxed and assessed a 10% penalty
tax. Avoid this penalty by rolling the money
into an Education Savings Account for a
younger family member or changing the
beneficiary on the existing account.
3 Tax Breaks for Higher Education
American Opportunity Tax Credit
(formerly Hope Scholarship Credit)
The American Opportunity credit can be
used for all four years of college and can be
used for books and course materials. The
credit is a maximum of $2500: 100% of the
first $2000 and 25% of the next $2000 of
qualifying expenses. Forty percent of the
credit is refundable (refunded even if you
owe no tax), unless student investment
income is taxed at the parent’s rate.
In 2013, the American Opportunity credit is
scheduled to revert to the Hope credit. The
Hope credit can only be used for the first
two years of post-secondary education. The
credit of up to $1800 per student is
calculated as 100% of the first $1200 of
tuition and fees plus 50% of the next $1200
(2009; as indexed for inflation). The credit is
used to reduce your income taxes, but it is
not refundable if the credit reduces your
taxes to less than zero.
To qualify for the American Opportunity or
Hope credit, a student cannot have been
convicted of a federal or state felony
involving the possession or distribution of a
controlled substance. Married taxpayers
must file jointly to claim the credit. These
credits cannot be used for classes to improve
or acquire skills.
Lifetime Learning Credit
The Lifetime Learning Credit allows a wide
range of students and educational programs
to qualify, including half-time degree
students and adults taking classes to acquire
or improve job skills. This tax credit can be
as much as $2000 per tax return, calculated
as 20% of tuition and fees up to $10,000.
The credit is used to reduce your income
taxes, but it is not refundable if the credit
reduces your taxes to less than zero.
Married taxpayers must file jointly to claim
the credit.
Student Loan Interest Deduction
Taxpayers can deduct interest on qualified
higher education loans as an above-the-line
deduction, meaning that even those who do
not itemize will be able to take the
deduction. Beginning in 2013, the deduction
will be limited to interest paid on the first 60
payments.
Qualified higher education loans are debts
incurred to pay qualified higher education
expenses for the taxpayer, the taxpayer’s
spouse, or any dependent of the taxpayer as
of the time the debt was incurred. Loans for
classes to improve or acquire skills do not
qualify. The loan must be for expenses that
were paid or incurred within a reasonable
period of time before or after the debt is
incurred. Married taxpayers must file jointly
to claim the deduction.
Qualified Tuition Programs (529 Plans)
These programs, often referred to as Section
529 plans, meet allow taxpayers to save for
or prepay tuition for a beneficiary and pay
no tax on distributions used for qualified
expenses. Nonqualified withdrawals are
subject to regular income tax plus a 10%
penalty (see IRS Publication 970 for
exceptions). Tuition plans are for degree
programs, not for classes to improve or
acquire skills. Rollovers from one plan to
another with the same beneficiary are
limited to once in 12 months.
Two types of plans fall under this category.
Prepaid tuition programs and savings plans.
Prepaid tuition plans: Check the prepaid
plan to see what flexibility you have if the
4 Tax Breaks for Higher Education
student attends an out-of-state school or a
private college. Both public and private
educational institutions can offer prepaid
tuition programs; distributions from those
programs are tax-free.
Savings plans: Compare deferred savings
plans from several states to find the best
arrangement for you and your children.
Evaluate the investment choices and the
variety of schools that are covered. Some
plans, especially the ones sold through
brokers, charge high commissions and
annual expenses.
Gift taxes may be owed if more than
$13,000 ($26,000 for a married couple;
2011, indexed for inflation) is contributed
per year for a single beneficiary. However, a
contribution can be treated as if made over
up to 5 years, allowing single contributions
of up to $65,000 ($130,000 for a married
couple; 2011, as indexed) without gift tax
consequences.
Employee Assistance Plans
Employers may offer financial assistance for
employee’s education of up to $5250 per
year that is not reported as income, whether
or not the classes are job-related. The
exclusion applies to both graduate and
undergraduate classes.
applies to both EE savings bonds purchased
after 1989 and I-bonds that offer inflationadjusted interest payments.
Withdrawals from IRAs
Traditional IRA. The early withdrawal
penalty tax (10%) does not apply if the
distribution is used to pay qualified higher
education expenses of the taxpayer, spouse,
or child or grandchild of the taxpayer or the
taxpayer's spouse. However, income tax is
still due.
Roth IRA. The early withdrawal penalty tax
(10%) does not apply if the distribution is
used to pay qualified higher education
expenses. You will still owe income tax on
the earnings in the account that were
distributed. However, you may owe little or
no tax since withdrawals from a Roth IRA
are treated as being taken from contributions
first, and there is no tax on withdrawals of
contributions. Therefore, the only tax you
might owe is on any earnings you withdraw
after you have withdrawn all of your original
contributions. You may not owe tax even on
the earnings if you meet the criteria for
regular retirement withdrawals.
Benefits, Requirements and
Limitations of Specific Tax Breaks
Savings Bond Interest Deduction
Interest from US savings bonds may be
excludable from income if used to pay for
higher education expenses of family
members. The exclusion phases out above
certain income levels. The bond owner must
have bought the bond after reaching age 24
and must be the sole owner or joint owner
with spouse. The interest deduction applies
in the year the bond is redeemed. Married
taxpayers must file jointly. This deduction
The following tables provide specific
information for each of the tax breaks
introduced above. This section will help you
determine whether you may be eligible for a
particular tax break, what particular
requirements you must meet, and exactly
what expenses are covered.
5 Tax Breaks for Higher Education
TAX BREAKS: BASIC CHARACTERISTICS
Income
ranges
over which
eligibility
is phased
out
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student Loan
Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings Bond
Interest
Deduction
IRA
Withdrawals
2011 to 2012:
modified AGI
$95-110,000
(single),$190$220,000
(joint)
2011 and 2012:
Modified AGI
$80-90,000
(single), $160180,000 (joint)
(2011, as
indexed)
Modified AGI
$51-61,000
(single), $102122,000 (joint)
(2011, as
indexed)
2011 and 2012:
Modified AGI
$60-75,000
(single), $120150,000 (joint),
(2009, as
indexed)
None
None
Modified AGI
$71,100$86,100
(single), $
106,650106,650 (joint)
(2011, as
indexed)
None
Contribution
limit depends
on the plan.
See
Highlights
and Tips
regarding gift
tax issues.
$5250
Up to amount
of qualified
expenses
Up to amount
of qualified
expenses
Beginning in
2013: Joint
income limits
drop to $150160,000
Annual
dollar limit
Contribution
per
beneficiary:
2011 and
2012: $2000
by April 15 of
following
year.
Beginning in
2013: $500
by Dec. 31.
Distributions
limited to
amount of
qualified
expenses.
Beginning in
2013, $5060,000 (single),
$100-120,000
(joint) (as
indexed)
2011 and 2012:
$2500.
Beginning in
2013: $1800 per
student
(indexed for
inflation)
Beginning in
2013: $4055,000 (single),
$60-75,000
(joint) (as
indexed)
$2000 per tax
return
$2500
Distributions
limited to
amount of
qualified
expenses.
6 Tax Breaks for Higher Education
WHOSE EXPENSES ARE ELIGIBLE?
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student
Loan Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings
Bond
Interest
Deduction
IRA
Withdrawals
Taxpayer
Yes, if he/she
is the
beneficiary
Yes
Yes
Yes
Yes, if he/she
is the
beneficiary
Yes, if he/she
is the
employee
Yes
Yes
Taxpayers
spouse
Yes, if he/she
is the
beneficiary
Yes
Yes
Yes
Yes, if he/she
is the
beneficiary
Yes, if he/she
is the
employee
Yes
Yes
Yes, if he/she
is the
beneficiary
Yes
Yes
Yes, any
dependent of
taxpayer as of
time debt was
incurred
Yes, if he/she
is the
beneficiary
Yes, if he/she
is the
employee
Yes
Child,
grandchild
No
No
No
Can change
the
beneficiary to
another
member of
the current
beneficiary’s
family.
No
No
Child,
grandchild
Dependent
Others
Can roll over
to member of
beneficiary’s
family
7 Tax Breaks for Higher Education
WHAT EXPENSES ARE ALLOWABLE?
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student
Loan Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings
Bond
Interest
Deduction
IRA
Withdrawals
Tuition and
fees
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Books
Yes, and
supplies
Yes.
Beginning in
2013, No.
No
Yes
Yes
Yes1
No
Yes, and
supplies
Room and
board
Yes2
No
No
Yes
Yes, if halftime or more
No
No
Yes, if halftime or more
Computer
technology,
equipment,
Internet
service
No
2010: only if
the computer
is needed
for enrollment
or attendance
at the
educational
institution.
No
No
Beginning in
2011,
computer
purchase
allowed only if
required by
the institution.
No
No
No
Beginning in
2011, No.
1
Also supplies and equipment except those that can be retained after course ends
2
If half-time or more and working toward recognized educational credential
8 Tax Breaks for Higher Education
REQUIREMENTS FOR STUDENT AND INSTITUTION
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student
Loan Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings
Bond
Interest
Deduction
IRA
Withdrawals
Eligible
student
required?
No
Yes
Yes, except
for expenses
to acquire or
improve job
skills
Yes
No, except for
room and
board
expenses
No
No
No
Eligible
institution
required?
Yes3
Yes3
Yes3
Yes3
Yes3
No
Yes3
Yes3
% time
required
NA except
half-time for
room and
board
Half-time
Half-time4
Half-time
NA except
half-time for
room and
board
NA
NA
NA except
half-time for
room and
board
3
Definitions of eligible institutions vary for different tax breaks. Generally, they are post-secondary educational institutions eligible
to participate in the federal student loan program, but may include others.
4
Can be less if education is for acquiring or improving job skills.
9 Tax Breaks for Higher Education
TYPE OF EDUCATION PROGRAM COVERED
5
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student
Loan Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings
Bond
Interest
Deduction
IRA
Withdrawals
Undergraduate
Yes
Yes. For 2011
and 2012, first
four years.
Beginning in
2013, first two
years only.
Yes
Yes
Yes
Yes
Yes
Yes
Graduate
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Recognized
credential
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Not specified
To acquire or
improve job
skills
No
No
Yes
No
No
Yes
Yes
Not specified
Elementary
and
Secondary
school
2011 and
2012: Yes5
No
No
No
No
No
No
No
Beginning in
2013: No
For public or private school expenses: tuition, fees, tutoring, books, computer equipment, room and board, uniforms, extended day care, services for
special needs students.
10 Tax Breaks for Higher Education
ADDITIONAL RESTRICTIONS ON CLAIMING TAX BREAKS
# times can
claim
Education
Savings
Account
American
Opportunity
(Hope) Credit
Lifetime
Learning
Credit
Student
Loan Interest
Deduction
Qualified
Tuition
Programs
Employee
Assistance
Plans
Savings
Bond
Interest
Deduction
IRA
Withdrawals
No limit, but
must use by
age 30
2011 and
2012: four
years per
student,
Beginning in
2013, two
years per
student.
No limit
2011 and
2012: No limit
No federal
limit
No federal
limit
No limit
No limit
Beginning in
2013: Limited
to first 60
payments
Can you
claim if you
are the
dependent of
another?
Yes
No, but
expenses
paid by a
dependent
are treated as
paid by the
parent
No, but
expenses
paid by a
dependent
are treated as
paid by the
parent
No
No federal
restriction
No federal
restriction
Yes
Yes
Married
couples
must file
jointly to
claim?
Apparently,
no
Yes
Yes
Yes
No
No
Yes
No
11 Tax Breaks for Higher Education
Explanation of Terms
Dependent
Eligible institution
A dependent is an individual whom you may
claim on your income tax.
Definitions of eligible institutions vary for
different tax breaks. Generally, they are
post-secondary educational institutions
eligible to participate in the federal student
loan program, but may include others.
Eligible student
The qualifications required to be an eligible
student vary by tax break. All require that
the student be enrolled at an eligible
educational institution. Some require that
the student attend at least half-time. The
Hope Credit requires that the student have
no convictions for possession or distribution
of a controlled substance. To check the
definition of an eligible student for a
particular tax break, see Tax Benefits for
Education, IRS Publication 970
(http://www.irs.gov/formspubs).
Half-time
For at least one academic period beginning
during the tax year, the student must take at
least one-half the normal full-time course
load for the course of study being pursued.
Modified AGI
Several tax breaks are available only to
those taxpayers whose modified adjusted
gross income (AGI) is under certain limits.
Adjustments to AGI vary with the individual
tax break. The modified AGI may require
adding foreign income and other amounts
not normally taxed, including some other
education tax breaks.
Qualified higher education expenses
Tuition and fees are included in qualified
expenses. Some tax breaks may allow books
and supplies to be included. Expenses for
room and board are allowed by some tax
breaks, usually for students who are enrolled
on at least a half-time basis. To qualify as
qualified higher education expenses, the
educational institution may also be required
to be "eligible.” (See “Eligible institution,”
above.)
12 Tax Breaks for Higher Education
Claiming and Combining Tax Breaks
Each tax break has rules governing how and
if it can be used in combination with other
tax breaks. Before committing to using a
particular tax break, compare to see if
claiming it will limit your ability to claim
another tax break that is more beneficial.
The following are general guidelines. Some
of these procedures may change if if
legislation does not extend rules that are set
to expire at the end of 2012. For more
details, please refer to the appropriate IRS
form or publication for the year in which
you are claiming the tax break. A list is
provided below.
If you are saving for higher education
expenses:
1. You can contribute to both an Education
Savings Account and a Qualified Tuition
Program for the same student in the
same year, at least until 2012. See Tips,
below, for more information.
2. Distributions from an Educational
Savings Account are tax-free if
contributed to a Qualified Tuition
Program.
3. Interest on qualifying savings bonds is
tax-free if the proceeds are contributed
to either an Education Savings Account
or a Qualified Tuition Program.
If you are paying for higher education
expenses:
1. You cannot claim the American
Opportunity (Hope) Scholarship and the
Lifetime Learning Credit for the same
student. You can claim them both if the
expenses are for different students.
2. Expenses paid with following types of
tax-free educational assistance cannot be
used to claim any deduction or credit
listed under numbers 3 or 4, below:
a. The tax-free portion of scholarships
and fellowships
b. Veteran’s education benefits
c. Pell grants6
d. Employee Assistance Plans
e. “Any other non-taxable (tax-free)
payments (other than gifts or
inheritances) received as
educational assistance.” (IRS
Publication 970)
3. After subtracting any expenses covered
by the types of tax-free educational
assistance listed above, apply the
remaining expenses to the following tax
breaks in the order shown. The same
expenses cannot be used to claim more
than one of these benefits:
a. American Opportunity (Hope) or
Lifetime Learning Credits.
b. Distributions from Education
Savings Accounts and Qualified
Tuition Programs. If you take
distributions from both, you must
allocate expenses between the two.
c. Savings bond interest deduction.
4. Calculate qualified expenses for
additional tax breaks as follows. First,
subtract expenses covered by tax-free
educational assistance listed under
number 2, above. Then:
a. Student loan interest deduction:
Subtract 1) non-taxable earnings
from Education Savings Accounts, 2)
non-taxable earnings from Qualified
Tuition Programs, and 3) the savings
bond interest deduction.
b. Withdrawals from IRAs that avoid
the 10% early distribution penalty:
Subtract distributions from
Education Savings Accounts.
6
Pell grants are not listed as an adjustment for the
student loan interest deduction or for the savings
bond interest deduction, so you may not have to
subtract expenses covered by a Pell grant when
calculating those two tax benefits.
13 Tax Breaks for Higher Education
The following IRS worksheets, forms, and guidelines for calculating tax breaks can be found on
the IRS web site at www.irs.gov.
Tax Break
IRS Publication
Education Savings Accounts
Publication 970, Tax Benefits for Education; Chapter 7,
Coverdell Education Savings Account, Worksheet 7-3.
Hope Learning Credit
Form 8863, Education Credits
Lifetime Learning Credit
Form 8863, Education Credits
Student Loan Interest Deduction
Form 1040 or 1040A instructions.
Qualified Tuition Program
Publication 970, Tax Benefits for Education; Chapter 8,
Qualified Tuition Program.
Employee Assistance Plan
Publication 970, Tax Benefits for Education; Chapter 11,
Employer-Provided Educational Assistance.
Savings Bond Interest Deduction
Form 8815, Exclusion of Interest from Series EE and I
U.S. Savings Bonds Issued After 1989
Distributions from IRAs
Publication 970, Tax Benefits for Education; Chapter 9,
Education Exception to Additional Tax on Early IRA
Distributions
Tips on Ways to Make the Most of
Tax Credits
 Coordinate contributions to a child's
Education Savings Account with other
family members since the per-year limit
on contributions is per child not per
contributor.
 In 2011 and 2012, you may contribute to
an Education Savings Account and a
Qualified Tuition Program in the same
year. Both contributions are gifts and
may trigger gift tax if a total of more
than the annual gift tax limit ($13,000
for 2011, indexed for inflation; $26,000
for a married couple splitting the gift) is
contributed in one year for the same
student.
 Contributions to a qualified tuition
program of up to $65,000 ($13,000 X 5,
for 2011) can be made in one year but
treated as made over up to 5 years,
avoiding gift tax issues. Contributions to
an Education Savings Account are not
eligible for this treatment. Contributing
to an Education Savings Account in the
same year you make a contribution
greater than the annual gift tax limit to a
tuition program will reduce the amount
of the tuition program contribution you
can exclude from gift taxes for each of
those five years.
 Bunching tuition payments into one tax
year may help you get the largest credit
or deduction.
 Different tax benefits have different
requirements for qualified expenses.
Match funds from different sources with
the right type of college expenses.
 Check to see if you must claim your
child as a dependent to claim the tax
credit.
14 Tax Breaks for Higher Education
 Check to see if you can take proceeds
from a home equity loan or credit line to
pay tuition and still take a tax credit.
income over $1800 for any dependent up
to the age of 18 and, fulltime students
under the age of 24 is taxed at the
parent’s rate.
 Part-time students are eligible for certain
tax credits.
 A Roth IRA may be an alternative to
other savings mechanisms. Distributions
are treated as coming first from
contributions, and contributions can be
taken out free of taxes or penalties at any
time. Distributions of earnings will be
taxed but will not be subject to the 10%
penalty when used for higher education
expenses.
 Eligibility for some tax breaks may be
lost if the wrong person pays the
expense. Rules depend on the tax break
and whether the student is a dependent.
Check IRS Publication 970 for details
and examples.
 Money in the name of a child will
usually affect financial aid more than
money in the name of the parent. Rules
regarding Education Savings Accounts
and Qualified Tuition Plans owned by
students changed in 2009 and may be
treated as either a student or a parent
asset, depending on circumstances.
Accounts owned by third parties may
result in non-taxable income to the
beneficiary, affecting aid calculations.
 Delay withdrawing money from
retirement IRAs or using other strategies
that will increase your reportable income
until late in the junior year or senior
year, when it won't affect eligibility for
financial aid.
 If you must sell investments to pay for
college, you may have heard the
suggestion to first gift the investments to
your child to sell at his (presumably)
lower tax rate. However, unearned
Suggested Resources



Tax Benefits for Education, IRS Publication
970. Available at www.irs.gov.
www.savingforcollege.com
Planning Strategies under the Education
Provisions of the New Tax Act, Journal of
Financial Planning, Sept. 2001, by Joseph
F. Hurley. Available at
http://www.fpanet.org/journal/.
This publication is also available on the web
at http://www.urbanext.uiuc.edu/taxbreaks/.
Written by: Karen M. Chan, CFP® and
Charlotte Crawford, CFP®, Extension Educators
in Consumer and Family Economics with the
University of Illinois Extension. Revised 20022011 by Karen M. Chan.
Copyright 2011 by the Board of Trustees of the
University of Illinois.
This publication is designed to provide accurate and
authoritative information in regard to the subject
matter covered. It is provided with the understanding
that the University of Illinois Extension is not
engaged in rendering tax, accounting, or other
professional advice. If advice or other expert
assistance is required, the services of a competent
professional should be sought.