Understanding Federal Education Tax and Savings Benefits

The federal government offers students and families more than just grants, work-study programs, and loans. They also created various education tax and savings account benefits to help make college more affordable for students and families. The education tax credits and deductions are designed to lower your tax burden. The education savings accounts provide special tax considerations when paying for eligible education expenses. The specific benefits available are as follows:

  • Tax Credits and Deductions
    • American Opportunity Credit
    • Lifetime Learning Credit
    • Student Loan Interest Deduction
    • Tuition and Fees Deduction
  • Savings Accounts
    • Qualified Tuition Programs
    • Coverdell Education Savings Accounts
    • Education Savings Bonds
    • Uniform Gift to Minors Act/Uniform Transfer to Minors Act

Below you will find an overview of the main terms and methods the federal government uses to qualify families for education tax and savings benefits. You can also refer to IRS Publication 970 Tax Benefits for Education for more specifics on these benefits.

Important Considerations

Since these tax and savings benefits are geared towards paying education expenses, it is important to coordinate which credits/deductions or savings accounts will pay for which expenses. It is necessary that you not only become more informed on these programs but also seek help from tax professionals and even financial planners well-versed in college planning.

Modified Adjusted Gross Income

To claim education tax credits and deductions as well as contributing to education savings accounts, the federal government uses your Modified Adjusted Gross Income (MAGI). The MAGI is used to determine if you qualify to claim or contribute and the amount you are able to claim or contribute. The MAGI is essentially your income earned from all sources after deductions are taken into consideration.

Phasout Limits

For many of the tax and savings benefits, the federal government has set phaseout limits. These limits are used to determine if you qualify to claim tax benefits or contribute to savings accounts. The phaseout has two limits: a lower limit and an upper limit.

The federal government then uses the MAGI to determine if someone qualifies for the tax and savings benefits. If the MAGI is less than the lower phaseout limit, then they qualify for the full tax claim or to contribute the maximum amount to savings accounts. If the MAGI is more than the upper phaseout limit, then they don't qualify at all for the claim or ability to contibute. If the MAGI is inbetween the lower and upper phaseout limits, then the amount they can claim or contribute is reduced according to a formula.

The phaseout limits for families that file their taxes as married filing jointly have double the lower and upper phaseout limits as those filing as single.

Eligible Education Expenses

While there are many costs associated with going to college, not all expenses are eligible for the education tax and savings benefits provided by the federal government. In fact, the list of eligible expenses will vary for each tax credit, deduction, and savings account. It is important to coordinate the payment of these expenses before you pay them not after. This is because payments from a savings account to cover an expense may not have been the best decision if that expense could have been covered under a tax credit or deduction.

The most common expenses cover by almost all of the benefits are tuition, mandatory fees, and course-related materials like fees, books, supplies, and equipment. Sometimes room and board are covered as well as expenses like transportation, special needs services, and computers. Pay special attention to which benefits you may qualify for and how you will pay for them.

Per Student Basis

Many families have multiple students attending college at the same time. The families may have students that are multiple children or even one child and a parent. For most education tax and savings benefits, each student is considered separate when claim and contributung to these benefits. This means that the tax plan for one student does not necessarily need to match the tax plan for another.



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