The federal tax laws provide several credits or deductions to help taxpayers who have higher-education expenses for themselves or their dependents. There are, of course, various income caps and limitations. However, a qualified tax accountant can help you walk through what credits or deductions are best in your situation.
To claim an educational credit or deduction, you or your dependent must be enrolled in an eligible educational institution. You also must have paid qualified educational expenses. Education credits include the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit (AOTC). Other possible deductions are those for student loan interest or the tuition deduction, which was set to expire this year, but was extended for the current year in a major spending bill on December 20, 2019.
LLC and AOTC
With the AOTC, taxpayers can claim up to $2,500 tax credit per student per year for the first four years of post-secondary education for you or your dependent. This credit is also partially refundable. If claiming the tax credit reduces your taxes to zero, you may receive a refund of up to 40% of the credit for a maximum of $1,000. Our tax code is not exactly straightforward, however, and this credit is another example of that. It covers 100% of the first $2,000 and 25% of the next $2,000, which is where they come up with a maximum of $2,500.
To qualify, you may use any filing status except Married Filing Separately. If your modified adjusted gross income (MAGI) is less than $80,000 filing singly or $160,000 filing jointly, you are eligible for the full credit. This gradually phases out until the MAGI of $90,000 filing singly or $180,000 filing jointly.
The LLC is available for any post-secondary education, even beyond the first four years. The student does have to be enrolled at least part-time, as in the case of the AOTC. However, this credit is not refundable and can only be applied to tuition costs. MAGI limitations are lower than the AOTC limits, becoming ineligible at $68,000 for singles and $136,000 for joint filers.
You can not take the AOTC and LLC in the same year for the same student, but you can use them for different dependents in the same year.
Tuition and fees deduction
This deduction does not require you to itemize. Your MAGI affects how much of a deduction you can take: a maximum of $4,000 for MAGI of $65,000 filing singly and $130,000 filing jointly, $2,000 maximum between $65,000-$80,000 filing singly or $130,000-$160,000 filing jointly, and no deduction over those amounts.
You cannot take either of the above tax credits and the tuition and fees deduction, so your tax accountant will probably run the numbers to see which credit or deduction is best. But this deduction can be taken any year that you or your dependent has tuition or fees and can be applied even if just one course is taken.
As stated, the LLC only covers tuition. Eligible expenses for AOTC and the tuition and Fees deduction include:
- Fees and other expenses required for enrollment
- Student activity fees required by the school
- Books, supplies, and equipment required for course study, even if not paid directly to the school
Ineligible expenses include:
- Room and board
- Medical expenses (including student health fees)
- Personal expenses
- Extracurricular fees that are not part of the student’s degree program
The LLC will cover expenses for sports, games, and other non-credit courses if you can show they help the student acquire or improve job skills.
Student Loan Interest Deduction
If you have taken out a federal or private student loan for yourself or your dependent, you are eligible to deduct up to $2,500 worth of interest payments as an adjustment of gross income. The MAGI requirements are similar to those for the tuition deduction, though they phase out completely at $85,000 filing singly and $170,000 filing jointly.
Get help from a qualified tax accountant
If you or your dependents have education expenses, there are a variety of ways to decrease your taxes, but to ensure you get the best results, get help from someone who is experienced. If you’re in or around the Willow Grove, PA area, give us a call here at Koelle. We’ve been helping families with their taxes for over 30 years.