College and other forms of higher education can be a significant financial commitment. Many parents spend years saving for their children’s education, while others may have had limited opportunities to save or encountered unexpected financial challenges.
The good news is that several tax benefits may be available when your child starts college or another postsecondary program. Depending on your circumstances, these benefits may be available to you, your child or even a grandparent who is helping with education expenses.
Here are several important tax tips to consider as you prepare for the upcoming school year.
Claim Available Education Tax Credits
If you have a child attending college or graduate school, you may qualify for one or more valuable education tax credits.
Tax credits are particularly valuable because they directly reduce your tax liability. Unlike deductions, which reduce the amount of income subject to tax, a tax credit can reduce your tax bill dollar-for-dollar.
Two education credits are especially important to consider: the American Opportunity Tax Credit and the Lifetime Learning Credit.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) can be worth up to $2,500 per eligible student for the first four years of postsecondary education leading toward a degree or other recognized credential.
The credit is calculated as:
- 100% of the first $2,000 of qualifying tuition, fees and book expenses
- 25% of the next $2,000 of qualifying expenses
The AOTC is also 40% refundable, meaning you may be able to receive a refund if the credit exceeds your tax liability, subject to the applicable rules.
The credit is available on a per-student basis. For example, if you have one child beginning college and another child in the fourth year of college, you could potentially claim up to $2,500 for each student if you meet all eligibility requirements.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) may be particularly useful when a child has completed the first four years of college or is attending graduate school.
The credit can be worth up to $2,000 per tax return, calculated as 20% of up to $10,000 in qualifying tuition and fees.
Unlike the AOTC, the LLC isn’t limited to the first four years of postsecondary education. However, only one Lifetime Learning Credit can generally be claimed per tax return.
For example, if you have one child in a fifth year of college and another child attending graduate school, you generally can claim only one LLC, worth up to $2,000.
On the other hand, if one child is still within the first four years of college, you may potentially claim the AOTC for that student and the LLC for another child in graduate school, assuming you qualify for both credits.
Pay Attention to Education Credit Income Limits
Both education credits are subject to income limitations.
For 2026, the credits are phased out for married couples filing jointly with modified adjusted gross income (MAGI) between $160,000 and $180,000. For single filers and heads of household, the phaseout range is $80,000 to $90,000.
Married taxpayers filing separately generally can’t claim either credit.
If your income is too high to qualify, your child may potentially be eligible to claim an education credit on their own tax return, depending on the circumstances.
Remember that you can’t claim both education credits for the same student during the same tax year. For example, if your child graduates from college in May 2026 and begins graduate school in September 2026, you generally can’t claim the AOTC for the final undergraduate semester and the LLC for the first graduate-school semester for that same student.
Additional eligibility requirements apply to both credits.
Use Tax-Free 529 Plan and ESA Distributions
If your child has money saved in a tax-advantaged education account, such as a Section 529 plan or Coverdell Education Savings Account (ESA), you may be able to use tax-free distributions to cover qualified education expenses.
For federal income tax purposes, qualified 529 plan distributions used for eligible postsecondary expenses are generally tax-free. Depending on the state, the distributions may also receive favorable state tax treatment.
Qualified expenses can include:
- Tuition and mandatory fees
- Books and supplies
- Computers and related equipment
- Computer software
- Internet access
- Room and board for students enrolled at least half-time
Many of these expenses may also qualify for tax-free ESA distributions.
However, you can’t use tax-free distributions from both a 529 plan and an ESA to pay for the same expenses. In addition, expenses paid with tax-free 529 or ESA distributions generally can’t also be used to calculate the AOTC or LLC.
If you have younger children and are deciding whether to contribute to a 529 plan or an ESA, remember that the accounts have different rules involving eligible expenses, beneficiary age limits and contribution restrictions. Consider your family’s circumstances before choosing between them.
Think Carefully Before Using Retirement Savings
Parents sometimes consider tapping retirement savings to help pay college expenses. While this can provide access to funds, it can also have significant long-term consequences.
Money withdrawn from a traditional IRA or Roth IRA to pay qualified higher-education expenses may avoid the 10% early-withdrawal penalty that generally applies to distributions before age 59½. However, the distribution may still be subject to income tax depending on the account type and circumstances.
You may also have the option of borrowing from an employer-sponsored retirement plan, such as a 401(k), or taking a distribution to help cover education expenses.
Before using retirement funds, carefully consider the tax consequences, potential penalties and long-term impact on your retirement savings.
Every dollar removed from a retirement account is money that may no longer benefit from tax-deferred growth — or potentially tax-free growth in the case of qualified Roth IRA earnings.
Understand How Scholarships Are Taxed
A scholarship can significantly reduce the cost of college, but it’s important to understand that not every scholarship is automatically tax-free.
Generally, a scholarship can be excluded from income when certain requirements are met. Among the key requirements are that the scholarship:
- Is awarded to a student who is a degree candidate at an eligible educational institution;
- Isn’t payment for services performed by the student; and
- Is used for qualified expenses such as tuition, fees, books and supplies rather than room and board.
There’s another important tax consideration: tax-free scholarship amounts generally reduce the expenses that can be used to calculate the AOTC or LLC.
As a result, a scholarship could reduce or even eliminate the education tax credits otherwise available to your family.
Consider Having Grandparents Pay Tuition Directly
Grandparents and other family members sometimes want to help with college costs by giving money to a student or the student’s parents.
Generally, gifts above the annual gift tax exclusion can have gift tax consequences for the person making the gift. For 2026, the annual exclusion is $19,000 per recipient, while married couples who elect to split gifts may generally exclude up to $38,000 per recipient.
However, there’s an important exception for tuition.
If a grandparent or another person pays your child’s tuition directly to the educational institution, the payment generally isn’t treated as a taxable gift, regardless of the amount.
This special rule applies to direct tuition payments. It generally doesn’t cover payments for room and board, books, supplies or other education-related expenses.
Because the rules can be complicated, families considering significant tuition payments should understand the tax consequences before transferring money.
Look at Your Family’s Overall Tax Strategy
Paying for college involves much more than simply finding the money to cover tuition. The way education expenses are paid can affect tax credits, scholarships, education accounts, gifts and even retirement planning.
Before the school year begins, review your family’s situation and determine which tax benefits may be available. The best strategy can depend on your income, filing status, the number of children attending school, how expenses are paid and the type of education account or financial assistance involved.
Contact us to discuss your specific situation. We can help you identify potentially valuable education tax breaks, understand the applicable rules and avoid common tax pitfalls as you help your children pay for higher education.
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