Tax Breaks for Higher Education in 2019

Overview of various tax credits, deductions, and savings incentives for college

Students at commencement ceremony
••• Andy Sacks/ Stone/ Getty Images

The federal government provides several tax incentives for college students and their parents, but they can change somewhat from year to year. A tax break you claimed on your last return might not be available this year. Congress might have breathed new life into one that expired, or tweaked others that have been around for a while. Here's an overview of the key tax breaks available in 2019 for pursuing post-secondary education.

College Savings Plans

Also called Section 529 plans, college savings plans are tax-favored savings accounts. They're similar to IRAs in that they allow taxpayers to save for college expenses by funding a special type of account. You can usually select your own portfolio options for investment within the plan.

Two types of 529 plans are available: education savings plans and prepaid tuition plans. The rules are marginally different for each, but their key benefits are the same:

  • Earnings and growth of investments inside the account accumulate without being taxed.
  • Withdrawals from 529 plans are tax-free as long as they're used for specified higher education expenses.

The distributed funds will be subject to taxes and a 10% surtax if they're not used for education-related expenses.

College savings plans are sponsored by state governments or by individual institutions, but you're free to invest through any school's or state's 529 plan. Some states offer incentives for investing their plans. All 50 states and the District of Columbia at least offer one.

The Student Loan Interest Deduction

Students often take out loans to pay for college tuition and expenses, and interest on these loans can be deductible up to $2,500 per year. If you don't spend $2,500 on interest, your deduction will be less. The deduction is how much you spent on qualifying interest or $2,500, whichever is less.

You must be the obligor on the loan. You can't claim a deduction for interest you paid on a loan that's in someone else's name. This isn't to say that you can't claim interest you paid on behalf of your son or daughter, but you must have personally taken out the loan on their behalf.

This deduction is gradually phased out as your income rises. The 2019 limits are $140,000 for married taxpayers filing jointly and $70,000 for all others except those who are married but filing separately. Married taxpayers filing separate returns can't claim this deduction.

The deduction reduces in amount beyond these income thresholds until it's finally eliminated entirely for those with incomes of $170,000 and $85,000 respectively. It's taken directly on your tax return. You don't have to itemize to claim it, and you can additionally claim the standard deduction or itemize other deductions.

The Higher Education Tax Credits

There are two tax credits for higher education: the American Opportunity credit (AOC) and the Lifetime Learning Credit (LLC).

The American Opportunity Credit is a tax credit of up to $2,500 for undergraduate education. This credit was scheduled to expire at the end of 2017, but that didn't happen. It's still alive and well.

The Lifetime Learning Credit provides a tax credit of up to $2,000 for any level of college education, even graduate school, and it doesn't require a minimum level of enrollment.

You can't claim both the AOC and the LLC in the same year, at least not for the same student's expenses. But you can claim the AOC for one student and the LLC for another, and the LLC has another benefit. That $2,000 is actually equal to 20% of the first $10,000 you spend on eligible education expenses, and you can pool the expenses together for more than one student to reach that total.

The AOC is partially refundable, however. First it reduces or eliminates your tax bill, then you can claim a tax refund for up to 40% of any balance that's left over. The LLC can only reduce or erase your tax debt.

The Lifetime Learning Credit has narrower income range limits compared to the tuition deduction. The amount of the American Opportunity Credit begins phasing out at incomes of $160,000 for married taxpayers filing jointly and $80,000 for all others, and it's eliminated entirely at incomes of $180,000 and $90,000. The limit is $116,000 in 2019 for joint filers who want to claim the LLC, although this is up from the $114,000 limit imposed in 2018.

Married taxpayers who file separate returns aren't eligible for the American Opportunity credit or the Lifetime Learning Credit, either.

The Tuition and Fees Deduction

Alas, the tuition and fees tax deduction is one that has been eliminated. You used to be able to take this deduction directly on your tax return without itemizing, and students didn't have to be enrolled half-time or full-time. Even taking one course could qualify you for this deduction.

It expired once, then the Bipartisan Budget Act of 2018 reinstated it retroactively but only through 2017. The tuition and fees deduction isn't available for the 2019 tax year, at least not as of the time of publication. But these things change, so keep tabs on the situation as the year goes on.