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Income Tax Benefits for Higher Education Costs

This page provides an overview of the main federal and Minnesota income tax provisions intended to help pay for college and other higher education costs. It is divided into two tables showing basic features of the provisions.

For more details on each provision, you can click on the links within the tables for a separate page of information on each tax provision.

Jump To
  • Tax Benefits table: provisions that reduce the cost of directly paying higher education costs
  • Savings Incentives table: savings or investment incentives designed to help individuals accumulate money to pay for higher education costs later
Tax Benefits for Higher Education Expenses
Summary of Features (tax year 2016)
Provision Tax Benefit Qualifying Expenses Who Can Claim Income Limits Other
Deduction for expenses $4,000 deduction Tuition and fees Parents and nondependent students $160,000 for married joint filers; $80,000 for single and head of household filers Cannot claim American Opportunity or Lifetime Learning Credit
American Opportunity Credit 100% credit for first $2,000 of expenses; 25% for next $2,000 of expenses
Maximum credit of $2,500
Tuition, fees, and required course materials Parents and nondependent students
Student must be full-time in first four years of study
$180,000 for married joint filers; $90,000 for single and head of household filers Cannot also claim Lifetime Learning credit
Lifetime Learning credit 20% credit for first $10,000 of expenses; maximum credit of $2,000 Tuition, fees, and required course materials Parents and nondependent students $130,000 for married joint filers; $65,000 for single and head of household filers Cannot also claim American Opportunity credit
Deduction for student loan interest $2,500 deduction Tuition, fees, room and board, books, supplies, equipment, and transportation Parents and nondependent students $160,000 for married joint filers; $80,000 for single and head of household filers
Education savings bonds Deduction of qualifying expenses paid with bond interest Tuition and fees Parents and nondependent students $146,300 for married joint; $92,550 for single and head of household filers  

Savings Incentives for Higher Education
Comparison of Education Savings Accounts and Qualified Tuition Plans (Section 529 Plans)
Common features of the two plans
Both plans provide similar tax benefits: The investment earnings and capital gains on the accounts are exempt from state and federal income tax, if withdrawals are used for qualifying education costs. Qualifying expenses are tuition, fees, books, supplies, and room and board. Education savings accounts may be used for elementary and secondary expenses as well as post-secondary expenses; qualified tuition plans for post-secondary expenses only. Expenses paid from withdrawals may not be used to claim the HOPE or Lifetime Learning credit. Withdrawals from both accounts may be used to make contributions to the other type of account.
 
Different characteristics of the two plans
Provision Contribution Limits Income Limits for Contributors Age Limit of Beneficiary Investment Direction State Features
Coverdell Education Savings Account (ESA) $2,000 per year for each beneficiary at the federal level; $500 at the state level $220,000 for married joint filers; $110,000 for single and head of household filers Age 18 for contributions; account must be liquidated by age 30 (except for special needs beneficiaries) Account owner may direct investment of account (picking stocks and bonds, etc.) None
Qualified Tuition Plans Dollar limit not specified; plans set limit so total in account does not exceed estimate of amount needed to pay qualifying expenses of the beneficiary No limit None Account owner may not exercise investment direction over account, but may chose account based on type of investment and make annual transfers None

March 2016

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