College Costs & Taxes: What Parents Need to Know
When a child starts college, family finances shift quickly. Tuition is the big piece, but the smaller costs add up just as fast. Housing, meal plans, books, transportation, and the constant “I need this for class” all become part of your monthly budget. It’s natural to wonder what any of this means for your taxes.
This is a simple overview of what actually changes when your child is in college and what you can still claim.
Claiming Your Student as a Dependent
Most parents can still claim their college student. The IRS looks at two things:
your child is under age 24
you provide more than half of their support
Support includes tuition, housing, food, and basic living costs. If you’re covering most of that, your child likely remains your dependent.
When you can claim them, you may qualify for a $500 Other Dependent Credit. It’s small, but it helps.
Education Credits and Income Limits
There are two main education credits: the American Opportunity Credit and the Lifetime Learning Credit. They help families who pay for tuition and required fees.
However, both credits phase out at higher income levels. Many families simply earn too much to qualify. It’s helpful to know this early so you’re not expecting a tax break that won’t apply.
Using a 529 Plan
A 529 plan is one of the few meaningful tax benefits for college costs. Money you withdraw is tax-free when used for qualified expenses. These include:
tuition
fees
books
required supplies
housing
Housing can be on-campus or off-campus. Off-campus housing is limited to the school’s published housing allowance. If the apartment costs more than the allowance, only part of it counts as a qualified expense.
Parent PLUS Loans
Some families use Parent PLUS loans. Interest on these loans can be deductible, but only if your income falls below the IRS limit. Many families are above that limit, so the deduction doesn’t apply.
Scholarships and Grants
Scholarships used for tuition and required fees are tax-free. When scholarship money is used for housing or meal plans, that portion becomes taxable income to the student. It usually doesn’t create a large tax bill, but it’s something to be aware of.
Student Jobs
If your child works part-time or through work-study, they may need to file their own tax return. Even if they file, they can still be your dependent as long as you meet the support rules.
What You Can’t Deduct
Many college costs feel like they should be deductible, but most are not. These include:
tuition, if your income is above the IRS limits
books and supplies, unless paid with 529 funds
dorm fees and meal plans, unless paid with 529 funds
transportation
personal items
technology
dorm or apartment furnishings
These expenses are simply part of supporting a college student.
A Steady Approach
College is a major milestone for your child and a major financial shift for you. Knowing what’s deductible, what isn’t, and how support rules work can make this season easier to manage.
If you’re sorting through tuition bills, housing costs, or questions about dependency rules, we can walk through your situation and make sure everything is handled correctly.
Disclaimer: Content published by Red Letter Accounting is provided for general educational and informational purposes only and should not be considered individualized tax, accounting, financial, or legal advice. Readers should consult a qualified professional regarding their specific circumstances before making financial or tax decisions.
Some content may be created with the assistance of artificial intelligence and is reviewed and edited by Red Letter Accounting before publication.
About the Author
Charmaine Dawson, MAFM is the Founder and Principal Accountant at Red Letter Accounting. She combines corporate accounting experience with a passion for helping business owners gain confidence through clear financial guidance.
Through the Red Letter Accounting blog, Charmaine and the team share practical insights on bookkeeping, accounting, taxes, and business finances to help you make informed decisions and keep more of what you earn.
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