If you spent money on education-related expenses for yourself or a dependent this year, you are likely eligible for a tax benefit on your 2019 return. Continue reading for answers to common questions regarding education-related tax deductions and credits.
Can I deduct my tuition and fees?
Yes. If your modified adjusted gross income is $65,000 or less (or $130,000 if married filing jointly), you may claim a deduction of up to $4,000. If your MAGI is between $65,001 and $80,000, you may claim a maximum deduction of $2,000.
Although the tuition and fees deduction was originally set to expire in 2017, it has been extended to December 31st, 2020. Eligible taxpayers may claim the tuition and fees deduction for tax years 2019 and 2020; the deduction may also be claimed retroactively for tax year 2018.
What about my student loan interest?
If your modified adjusted gross income (MAGI) is less than $85,000 (or $170,000 if you are filing a joint return), you may be able to deduct up to $2,500 of interest paid on qualified student loans for yourself or one of your dependents.
Qualified student loans must meet several requirements outlined in this IRS publication.
Eligible taxpayers can take the student loan interest deduction whether they choose to itemize or take the standard deduction.
Can I deduct work-related education expenses?
If you are self-employed, a qualified performing artist, a fee-based state or local government official, or a disabled individual with impairment-related education expenses, you may be able to deduct the cost of work-related education expenses paid during the year as a business expense.
These expenses must meet at least one of the following criteria:
The education is required by law in order to keep your job, present salary, or professional status.
The education maintains or improves skills needed in your present work.
However, even if one or both of these conditions are met, you may not deduct work-related education expenses if the education is required to meet the minimum educational requirements of your present trade or business, or if its purpose is to qualify you for a new trade or business.
Deductible work-related education expenses include:
Tuition, books, supplies, lab fees, etc.
Certain transportation and travel costs
Additional educational expenses such as the cost of research
The IRS has provided a helpful online tool to help you determine if your work-related education expenses are tax-deductible.
What tax credits are available to me? How are they different from tax deductions?
Whereas tax deductions reduce the amount of income subject to taxation, a tax credit directly reduces your tax liability dollar-for-dollar.
For tax year 2019, there are two education-related tax credits: the American opportunity tax credit and the lifetime learning credit. In order to qualify for either of these credits, you must meet the following criteria:
You, your spouse, or a third party (such as a friend or relative) paid qualified expenses for higher education for yourself, your spouse, or a dependent during the tax year. These payments must have been paid in 2019 for academic periods beginning in 2019 or during the first three months of 2020.
You, your spouse, or a dependent must be enrolled at an eligible educational institution. An eligible educational institution is a school offering higher education beyond high school. This includes most accredited public, nonprofit, and privately-owned-for-profit postsecondary institutions.
In order to claim either of these credits, you, your spouse, or you dependent must have received a Form 1098-T from an eligible education institution, and a completed Form 8863 must be attached to your return.
Lifetime Learning Credit (LLC)
The lifetime learning credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. Qualified expenses include tuition and fees paid for undergraduate, graduate, and professional degree courses. This credit is worth up to $2,000 for eligible taxpayers with a modified adjusted gross income (MAGI) below $68,000 (or 136,000 if filing a joint return).
This credit is available for one or more courses and is not limited to a maximum number of years; it can be claimed as long as you, your spouse, or a dependent meet eligibility requirements.
The lifetime learning credit is a nonrefundable credit; if the credit amount exceeds your taxable income, you will not receive the remainder as a tax refund.
American Opportunity Tax Credit (AOTC)
This credit can be claimed for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum benefit is $2,500 per eligible student, and can be claimed for four tax years per eligible student.
Whereas eligible taxpayers can claim the lifetime learning credit indefinitely, the American opportunity credit is available for only four years of post-secondary education.
You, your spouse, or a dependent must be pursuing a degree or other recognized education credential and have been enrolled at least half time for at least one academic period beginning in the tax year. Eligibility also requires that you do not have a felony drug conviction at the end of the tax year.
In order to claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less. If your MAGI is between $80,000 and $90,000, you may receive a reduced amount of the credit. If your MAGI is over $90,000, you cannot claim the American opportunity credit.
Because this is a refundable tax credit, if the credit surpasses the amount of tax you owe, you will receive 40% of the remaining amount of the credit as a refund.
What is the education savings bond program, and how does it affect my taxes?
Although tax must be paid on most U.S. savings bonds, the education savings bond program allows eligible taxpayers to exempt all or part of the interest earned on eligible savings bonds upon redemption. In order to take advantage of this tax benefit, the following eligibility criteria must be met:
The savings bond is a series I bond or a series EE bond issued after 1989.
The bond is issued in your name as the sole owner or in the names of you and your spouse as co-owners.
The bond owner must be at least 24 years old before the bond’s issue date.
You are not filing your tax return under the married filing separately status.
Your modified adjusted gross income (MAGI) is less than $96,100 (or $151,600 if married filing jointly).
You pay qualified education expenses for yourself, your spouse, or a dependent.
Qualified education expenses include tuition and fees required for enrollment or attendance at an eligible educational institution, contributions to a qualified tuition program (QTP), and contributions to a Coverdell education savings account (ESA).
An Important Limitation: No Double Benefits
Taxpayers are prohibited from taking more than one education benefit for the same student during a single tax year; you must choose between the tuition and fees deduction, the American opportunity tax credit, and the lifetime learning credit. Additionally, tax-free educational assistance (such as grant money, employer-provided educational assistance, or veterans’ educational assistance) must be subtracted from your qualified education expenses.
What factors could disqualify me from receiving an education credit?
If you are listed on someone else’s tax return as a dependent, you cannot claim an education credit. You are also considered ineligible for these credits if your filing status is married filing separately, you or your spouse were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes, or you already claimed or deducted another higher education benefit for the same student or expenses.
Contact your local CPA for more answers to your questions this tax season.
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