How College Costs and Financial Aid Affect Tax Returns

Record expenses and aid carefully so you can claim the proper credits

Students listening to teacher in class

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In addition to the stressful work of applying to colleges, completing a FAFSA every year, and learning about financial aid, college students (or their parents) have to be aware of the income tax implications of every step they take.

While certain tax credits and deductions can help lessen the impact of paying for college, the IRS can be a little picky about the documentation it requires to substantiate those claims. You certainly want to claim all the deductions you can, but you don’t want to raise any potential red flags.

Read on for a few steps parents, or students paying their own way, can take to ensure their tax forms are filled out properly.

Key Takeaways

  • Proper records will help you accurately complete your tax forms when it's time to file, so record all the money your student receives for school, whether from savings, scholarships, or grants.
  • You may be able to claim the Lifetime Learning Credit or the American Opportunity Tax Credit if you meet the qualifications.
  • You can deduct educational expenses, but you must be sure that each expense is a qualified deduction according to the IRS.
  • Your best bet is to be careful when filling out your tax return and get professional help if you need it.

Record Money You Receive

If a student received money to pay for college expenses, whether in the form of a scholarship, grant, or withdrawals from a 529 plan, you'll need to record these correctly on your federal income tax return. To help you, you'll receive forms from various entities involved.

For example, the college will send the tuition-paying student (or the parent, if the student is a dependent) a 1098-T, which will detail the amount of tuition, grant, and scholarship assistance the student has received.

Students (or their parents) who have made withdrawals from a 529 investment, prepaid plan, or a Coverdell Education Savings Account may receive a 1099-Q: Payments From Qualified Education Programs. The form will show you the total amount of distributions for the year (even if it didn't all go directly to the school).


If you're the parent, make sure that the distributions are made in the student's name, not yours, or you may be required to claim the distributions as taxable income.

If your student received financial assistance from other sources, such as an employer or the Veterans' Administration, you'll need to document that carefully, as well.

Claim the Proper Tax Credits

You may be able to claim a tax break such as the Lifetime Learning Credit or the American Opportunity Tax Credit if you meet qualifications.

Lifetime Learning Credit

The Lifetime Learning Credit can be claimed by the student, the student's spouse, or the person who claims the student as a dependent. It provides a deduction of up to $2,000 if the student is enrolled at an eligible institution and taking courses toward a degree or to improve job skills. The credit starts phasing out when you have a modified adjusted gross income (MAGI) of $80,000 ($160,000 for joint returns), and it becomes unavailable once your MAGI reaches $90,000 ($180,000 for joint returns).

American Opportunity Tax Credit

The American Opportunity Tax Credit is a credit of up to $2,500 toward expenses for eligible students in the first four years of earning a degree. If your credit pays your taxes down to zero, you also can get a refund of up to $1,000 of the remaining credit. To claim the credit, your MAGI must be $80,000 or less ($160,000 if married filing jointly), with an adjusted amount for filers with a MAGI of up to $90,000 ($180,000 if married filing jointly).


The IRS provides a tool to help you discover whether you qualify for educational credits.

Deduct Qualified Education Expenses

Withdrawals from 529 plans must go toward qualified educational expenses. If you made withdrawals or want to claim a deduction, you will need to know what expenses count as qualified education expenses to the IRS.

In general, qualifying expenses include the normal costs of enrollment and attendance. These could include:

  • Tuition
  • Required fees
  • Course-related expenses such as books and supplies

Expenses that usually do not qualify include:

  • Room and board
  • Transportation
  • Student health insurance and medical expenses
  • Student fees (unless they are required as a condition of enrollment or attendance)


Be aware of what money you use to pay for college expenses. You can't "double-dip" when it comes to tax breaks—that is, you cannot claim an additional credit for expenses that you paid with a scholarship, grant, tax-free distribution, or a tax-free educational assistance program.

Keep Supporting Documentation

The best way to survive an audit, if you are ever selected for one, is to be able to provide documentation for everything. Receipts and other documents help you prove that the money was spent on qualified educational expenses.

Maintain copies of all receipts or canceled checks and have copies of class transcripts on hand, as well, to show that your student completed specific courses.

Keep copies of each course syllabus so that you can justify purchasing required books or materials, and keep receipts for those purchases. If you paid out of pocket for computer equipment, internet access, or other types of technology, that should also be the documentation you keep filed with the rest of your tax documents.


You may want to use a separate checking account or credit card to pay for college expenses so that they will be easier to track.

Fill Out Your Return Carefully

Don't speed through the education portions of your tax return. Take your time, transfer numbers carefully from your 1098s and 1099s, and check your math twice. You don't want a simple error to result in an audit. Tax preparation software can help you with your calculations, and it may even provide an additional math guarantee.

If you received a refund from the college, be sure to subtract that from any amounts you are claiming.

Get Help If Needed

Preparing your taxes while you or your dependent is in school can be confusing, and it might be advisable to work with a tax preparation professional. The amount you invest in having someone else make sure your tax returns are completed correctly could be well worth it if you don't have to deal with the stress of an IRS audit.

Frequently Asked Questions (FAQs)

Where do you enter financial aid on your tax form?

Typically, you'll use your financial aid information to claim deductions, but occasionally you'll need to report it as taxable income. For example, if you're claiming educational expense deductions or college-related tax credits, you'll need records of the aid you received and what you spent it on. On the other hand, scholarship money that you use for unqualified expenses, such as room and board, may be taxable and will need to be reported.

How does financial aid affect your tax refund?

If you have grants, scholarships, or federal student loans and spend them on non-qualified education expenses, you may need to report the aid as taxable income and that could lower your tax refund. If you spend them on qualified education expenses, however, the aid is usually not taxable, so it won't affect your refund.

On the other hand, if you have eligible education spending and qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit, it may lower your tax liability enough for a refund. And the American Opportunity Tax Credit is partially refundable, so if the credit reduces your tax liability past zero, you can get the remainder refunded to you (up to $1,000).

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  1. IRS. "About Form 1098-T, Tuition Statement."

  2. IRS. "Instructions for Form 1099-Q (11/2019)."

  3. H&R Block. "Is Income Reported on Form 1099-Q Taxable?"

  4. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."

  5. IRS. "American Opportunity Tax Credit."

  6. IRS. "Topic No. 313 Qualified Tuition Programs (QTPs)."

  7. IRS. "Qualified Educational Expenses."

  8. Fidelity. "How to Spend From a 529 College Plan."

  9. IRS. "Topic No. 421, Scholarships, Fellowship Grants, and Other Grants."

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