If you, or those that claimed you as a dependent, incurred education expenses during the year, or for education that is scheduled to start within the first three months of the following year, those expenses may qualify as a deduction or credit.
Types of Deductions and Credits
Eligible filers, including students and parents, may be able to take advantage of tax credits and deductions if they paid education expenses, even if the expenses were paid with a student loan. Options for tax savings include:
American Opportunity Credit
This credit provides the opportunity to reduce tax liability by up to $2,500. Filers can claim all of the first $2,000 paid for tuition, books, equipment, and school fees, plus up to 25% of the next $2,000 spent on those items. Note that living expenses and transportation expenses cannot be claimed. Students and parents can take advantage of that tax credit as long as they paid the education expenses. For parents claiming the credit, the student must also be claimed as a dependent on their tax return. To qualify for the full credit of $2,500, an individual’s modified adjusted gross income (MAGI) must be less than $80,000, and for those filing jointly with a spouse, it must be less than $160,000. The credit is reduced for individuals with MAGI between $80,000-$90,000, and joint filers with MAGI between $160,000-$180,000. Those with MAGI greater than these amounts will not qualify for the credit. Also note that this credit qualifies as refundable, so if the taxpayer is due a refund, the refund amount could be increased with this credit.
Lifetime Learning Credit
This credit provides reimbursement for up to $2,000 in tuition expenses, books, school supplies, and school fees. And, as with the American Opportunity Credit, living and transportation expenses cannot be claimed. To qualify for the full credit, the taxpayers MAGI must be less than $59,000 for individuals and $118,000 for those filing married-jointly. A partial credit can be taken for individuals with MAGI between $59,000-$69,000 and joint filers with MAGI between $118,000-$138,000. Those with MAGI greater than those amounts are not eligible for the credit. The Lifetime Learning Credit can be claimed for any education expenses, including undergraduate, graduate, non-degree, and vocational training. Note that the American Opportunity Credit and Lifetime Learning Credit cannot be claimed in the same tax year, and the Lifetime Learning Credit is not refundable to those receiving a tax refund.
Tuition and Fees Deduction
This deduction allows taxpayers to deduct up to $4,000 in education expenses, including tuition, fees, books, and supplies. And, as with the tax credits, living and transportation expenses cannot be claimed. Note that this deduction will not be available starting in the 2021 tax year. Those eligible for the full deduction were individuals earning less than $65,000 and married joint filers earning less than $130,000. Individuals with earnings between $65,000-$80,000 and joint-filers earning $130,000-$160,000 were eligible for up to a $2,000 deduction. Note that those claiming a Tuition and Fees Deduction were not eligible to receive either Education Tax Credit in the same tax year.
Also noteworthy is that tax filers can deduct interest paid on student loans during the tax year from taxable income. Also, if an employer contributed to the cost of education during the tax year such as through a tuition reimbursement plan or student loan repayment plan, the taxpayer can deduct up to $5,250 of expenses not covered by the employer-sponsored plan from their taxable income.
What are Considered Education Expenses
Only specific education expenses qualify for a tax credit or deduction. Expenses that are eligible for a credit or deduction include:
-Books purchased directly through the education institution
-School related fees
-Equipment required for obtaining the education
-Associated expenses for obtaining the education (i.e., research, etc.)
Job-Related Education Expenses
If an education-related expense is work-related, in addition to the eligible expenses noted above, transportation expenses between the individual’s workplace and school can be claimed. For an education expense to be considered job-related, the training:
-must maintain or improve the skills required for the individual’s current job, trade, or business (if self-employed)
-must be required by the individual’s current employer
-is required by law to maintain a license to practice a trade or profession