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Education Tax Incentives

There are a variety of money saving tax benefits available to taxpayers that may help reduce the overall cost of a college education. The IRS offers various tax savings (deductions or credits) to individuals and families paying higher education expenses.

(The following information is intended for educational purposes and should not be considered as legal or tax advice.  You should consult your professional tax advisor or attorney for more information about the higher education tax benefits and to determine your eligibility. You also may consult the IRS Publication 970 on Tax Benefits for Education.)

Hope Scholarship Tax Credit
The Hope Scholarship is a tax credit (not a scholarship) designed to help offset education expenses. Tax credits are subtracted from the tax your family owes.
  • If you owe less in taxes than the maximum credit, you may only take the credit up to the amount of taxes owed.
  • Up to $1,800 ($3,600 for Midwestern disaster areas2) for each eligible dependent student may be claimed for the first two years of college. The student(s) must be listed as a dependent on your federal tax return unless the credit is for the taxpayer or the taxpayer's spouse.
  • Eligible students must be enrolled at least half-time in a degree or certificate program and have no felony drug convictions before the end of the tax year.
  • Eligible education expenses include tuition and other related expenses1.
Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit may be subtracted from the tax your family owes.
  • If you owe less in taxes than the maximum credit, you may only take the credit up to the amount of taxes owed.
  • A credit of up to $2,000 per family ($4,000 for Midwestern disaster areas2) per tax return may be claimed for all years of postsecondary education and for an unlimited number of tax years. The student(s) must be listed as a dependent on your federal tax return unless the credit is for the taxpayer or the taxpayer's spouse.
  • Eligible students must be enrolled in at least one postsecondary education course. The course must either be part of a degree program or taken to acquire or improve job skills.
  • Eligible education expenses include tuition and other related expenses1.
Tuition & Fees Deduction
The Tuition and Fees Deduction reduces the amount of your taxable income.
  • Up to $4,000 paid for tuition and fees may be deducted as an adjustment to income even if you do not itemize deductions. This may benefit tax payers who do not qualify for the Hope or Lifetime Learning tax credits. The student(s) must be listed as a dependent on your federal tax return unless the credit is for the taxpayer or the taxpayer's spouse.
  • Eligible students must be enrolled in one or more courses at an eligible educational institution and must have either a high school diploma or GED.
  • Eligible education expenses include tuition and other related expenses1.  Midwestern disaster areas may qualify for an expanded list of educational expenses2.
Student Loan Interest Deduction
You can deduct interest paid on student loans to reduce your amount of taxable income.
  • To be eligible, the loans(s) must have been borrowed to pay qualified educational expenses for a student who was enrolled at least half-time in a postsecondary degree or certificate program.
  • A maximum of $2,500 may be deducted each year. The allowable deduction decreases as income increases.
  • In addition to simple interest on the loan, the following also may be considered student loan interest: loan origination fees, capitalized interest, interest on revolving lines of credit used to pay qualified educational expenses, interest on refinanced student loans, and voluntary interest payments.
  • Loans must have been used to pay for higher education expenses which may include tuition, fees, room & board, books, supplies, equipment, transportation and other related expenses.
1 Related education expenses may include student activity fees and expenses for course-related books, supplies, and equipment, but only if these fees must be paid directly to the college or university as a condition of enrollment or attendance.

2Students attending an eligible educational institution in the Midwestern disaster areas of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin may qualify for special Midwestern disaster area benefits for the Hope or Lifetime Learning Credit or the Tuition and Fees Deduction.

Following are the affected counties in Iowa:

Adair, Adams, Allamakee, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan, Butler, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dubuque, Fayette, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Howard, Humboldt, Iowa, Jackson, Jasper, Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Polk, Pottawattamie, Poweshiek, Ringgold, Scott, Story, Tama, Union, Van Buren, Wapello, Warren, Washington, Webster, Winnebago, Winneshiek, Worth, and Wright. 

The definition of qualified education expenses is also expanded for students in Midwestern disaster areas.  In addition to tuition and fees required for enrollment, qualified education expenses for student in the above areas include the following:

  • Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution
  • For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
  • For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the allowance for room & board that was included in the cost of attendance or the actual amount charged if the student is residing in housing owned or operated by the institution.

When to claim what!
Program specifics vary, but in general:
  • You may take only one tax credit for each eligible student per tax year.
  • More than one benefit may be claimed in the same year if you are using a different student's expenses to determine the credit (e.g., the Hope Scholarship can be claimed for your college freshman and the Lifetime Learning credit may be claimed for your college junior).
  • You may take a tax-free distribution form a Qualified Tuition Program or Coverdell Education Savings Account and also claim either the Hope Scholarship, Lifetime Learning credit, or Tuition and Fees Deduction as long as the same education expenses are not used to qualify for each benefit and you do not exceed the maximum Lifetime Learning benefit. You will receive a 1098-T from the college or university that your student attends. The 1098-T will specify the amount of eligible expenses that may be used when calculating your tax credits. You may not claim expenses that were paid with tax-free scholarship, grants or other educational assistance OR expenses used to claim a different tax benefit or deduction.
You may wish to talk to a tax advisor for help in determining which tax benefit is best for you.

The higher education tax benefit information provided above is believed to be correct as of (January, 2009). It is intended to provide general information and should be used for comparison purposes only. Refer directly to IRS Publication 970 for more specific information.