Taxes When You Send a Child to College

The year your child starts college is the year education tax benefits become real and valuable. Several provisions in the tax code are specifically designed to offset the cost of higher education — knowing which to prioritize can meaningfully reduce your tax bill.

The most valuable education credit is the American Opportunity Tax Credit (AOTC), worth up to $2,500 per student per year for the first four years of college. The credit is 100% of the first $2,000 in qualified expenses and 25% of the next $2,000. It's partially refundable (up to $1,000), which means you can receive money back even if the credit exceeds your tax liability. To claim it, the student must be enrolled at least half-time in a degree program, and the credit phases out for single filers earning more than $80,000 ($160,000 for joint filers). The Lifetime Learning Credit is available for years beyond the first four or for graduate school, but it's worth less ($2,000 maximum, non-refundable) and less generous overall.

If you've been saving in a 529 college savings plan, withdrawals used for qualified education expenses — tuition, fees, required books and supplies, room and board (if enrolled at least half-time) — are completely tax-free at the federal level. If 529 withdrawals exceed qualified expenses in the same year, the excess earnings portion is taxable as ordinary income and subject to a 10% penalty. Coordinating 529 withdrawals with education credits is important: expenses paid with 529 funds generally can't also be used to claim the AOTC, so it's worth thinking about which expenses you apply each benefit to in order to maximize the overall tax savings.

If your student borrows money to pay for college and later repays the loans, the student loan interest deduction allows the person making the payments to deduct up to $2,500 of interest paid, subject to income limits ($75,000 for single filers, $155,000 for joint filers in 2024). This is an above-the-line deduction, meaning it reduces your AGI without requiring itemization. If your child is still your dependent, you cannot deduct the interest even if they're the ones making the loan payments — only the person legally liable for the loan and who actually pays it can claim the deduction.

As a parent, you can continue to claim your college student as a dependent if they meet the qualifying child or qualifying relative tests — generally, a full-time student under age 24 who lived with you for more than half the year and didn't provide more than half their own support qualifies as a dependent. The dependency test matters because it determines who gets to claim education credits and other benefits. If the student provides more than half their own support (such as from a job or scholarship), the parent may lose the ability to claim them, though in that case the student may be eligible to claim education credits on their own return.