As August ushers in back-to-school season, many families may be thinking about new supplies, schedules and send-offs. But beyond the backpacks and last-minute bookstore runs, this season also provides an opportunity to invest in your student’s future… and save on taxes while you’re at it.
Whether you’re a student, a parent navigating college costs or a relative looking to give a meaningful gift, here are some strategies to maximize educational support without triggering unintended tax consequences.
Scholarships & Grants
Scholarships and grants are generally tax free when used for qualified education expenses; including tuition, required fees and course-related expenses such as books and supplies. However, any portion used for non-qualified expenses, like room and board or optional equipment, is taxable and must be reported as income.
| Expense Type | Tax-Free? |
| Tuition and required enrollment fees | Yes |
| Required course-related books, supplies and equipment | Yes |
| Room and board | No |
| Travel and transportation | No |
| Optional books, supplies or equipment | No |
To qualify, the student must be a candidate for a degree at an eligible educational institution, and the scholarship must not be payment for services such as teaching or research.
Credits & Deductions
Students (or parents who claim students as dependents) may qualify for the American Opportunity Credit (up to $2,500/year) or the Lifetime Learning Credit (up to $2,000/tax return).
Even after graduation, students (or parents paying loans in their name) may deduct up to $2,500 in student loan interest. This deduction, however, will be gradually reduced and eventually eliminated once the taxpayers modified adjusted gross income reaches the filing status phaseout limit.
Gifting Education
Investing in a loved one’s education doesn’t have to mean sacrificing your own financial stability or triggering a tax gift. Here are some tips to gift education with confidence.
- Paying tuition directly to a qualifying institution on behalf of someone else is not considered a taxable gift. (IRS FAQ)
- 529 Plan distributions are tax-free when used to pay for qualified expenses, such as tuition and required fees, books, supplies, equipment and special needs services. Room and board also qualify if the beneficiary is at least a half-time student. (IRS)
- Gifting student loan repayments can be beneficial in helping a loved one repay their debt, but these payments will be subject to gift tax.
Whether it’s contributing to a 529, a tuition payment or researching scholarships, think beyond backpacks and binders this August. If you feel lost, don’t hesitate to reach out and schedule a consultation with one of our accountants at Murtha & Flischel.