Back to School Tax Benefits
As the fall season approaches many of us are heading back to school or have children heading back to the classroom. And, while the cost of attending college can be significant, there are a few tax breaks that can help offset those climbing expenses. Here’s an overview of the back to school tax benefits to know as you head down the path to higher education.
Which college expenses are tax deductible?
It’s always important to check which college expenses are tax deductible or allow you to take a credit, especially given recent tax changes.
Tuition and Fees
After 2020, tuition and fees became no longer tax deductible. The phaseout for this deduction began at $65,000 ($130,000 for Married Filing Jointly) for 2020. Before 2021, you could generally claim the tuition and related expenses deduction if you paid qualifying education expenses for higher education, paid the education expense for an eligible student, and the eligible student was you, your spouse, or your dependent.
Work-Related Education Expenses
Due to a tax reform change, work-related education expenses are not available for employees from 2018 – 2025. Before this change, you may have benefitted from a deduction if the education was required by your employer or by law.
However, if you are self-employed you may be able to deduct education expenses. The education must enhance or improve skills related to your trade or business or must be required by law.
Student Loan Interest
Student loan interest remains tax deductible. This college expense deduction lets you reduce your taxable income by up to $2,500 for qualified student interest paid during the year. In this case, qualified means the loan was only for education expenses, not for other types of expenses.
The requirements state that the student must be the taxpayer, spouse or dependent. The student must have been enrolled at least half-time at an eligible institution and the program must lead to a degree, certificate or other recognized credential. Furthermore, the loan cannot be from a related person or a qualified employer plan.
What is considered a qualified education expense?
When you claim a credit, such as the American Opportunity Credit or the Lifetime Learning Credit, only certain types of educational expenses are eligible. Let’s learn more about these credits and who qualifies for them.
American Opportunity Credit
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.
In addition to tuition and fees, you can include expenses for books, supplies and equipment (including computers if required as a condition of enrollment)— even if they are not paid to the school.
Who is an eligible student for AOTC?
To be eligible for AOTC, the student must:
- Be pursuing a degree or other recognized education credential.
- Be enrolled at least half time for at least one academic period beginning in the tax year.
- Not have finished the first four years of higher education at the beginning of the tax year.
- Not have claimed the AOTC or the former Hope credit for more than four tax years.
- Not have a felony drug conviction at the end of the tax year.
Lifetime Learning Credit
The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
Who can claim the LLC?
To claim the LLC, you must meet all three of the following:
- You, your dependent or a third party pay qualified education expenses for higher education.
- You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse or a dependent you listed on your tax return.
What doesn’t count as qualified expenses?
In general, insurance, medical expenses, transportation, and living expenses are not qualified school expenses for an education credit. Likewise, non-credit courses are not qualified education expenses, unless they are part of a degree program.
Whether you need help determining what you can deduct or your eligibility for education-related benefits, we can help. Our knowledgeable tax pros are experts in uncovering all the credits and deductions available to you.
Make an appointment to speak to one of our tax pros today.