The average cost of attending a public college during the 2019-2020 school year was $26,590, including room and board. Private colleges necessitate an average budget of $53,980.
With the cost of higher education consistently rising, you are undoubtedly wondering if college expenses are tax-deductible. The answer: yes, but with conditions.
Title 26 of the U.S. tax code, Section 222, states that qualified taxpayers can claim the tuition and fees deduction for appropriate educational expenses. This deduction was set to expire at the end of 2017, but the Further Consolidated Appropriations Act, 2020 extended it for the 2018, 2019, and 2020 tax years.
If you did not claim this deduction on your previous year’s tax return, it might be possible to file an amendment. The tuition and fees deduction is also separate from the student loan interest deduction.
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Tuition and Fees Deduction
Many tax filing software options, such as TurboTax and eFile, allow taxpayers to claim the tuition and fees deduction. According to TurboTax, you may deduct up to a total of $4,000 from your income for tuition expenses you paid for yourself, your dependents, or your spouse.
Not all higher-education related expenses qualify for the tuition and fees deduction. Such payments must be directly related to education during the year, education that begins within the year, or education that starts within the first three months of the next year.
You cannot claim a deduction for costs related to room and board, optional costs (student health insurance, for example), course books that do not require you to purchase them directly from the school, and any extracurricular activities that are not part of your degree program.
The tuition and fees deduction is an above-the-line deduction. This term means that you do not need to itemize deductions in order to claim it. The amount you can deduct is as follows:
- $4,000 if your modified adjusted gross income (MAGI) is $65,000 or less, or $130,000 or less when filing jointly;
- $2,000 if your MAGI is greater than $65,001 but less than $80,000 (over $130,001 and below $160,000 if filing jointly);
- Nothing if your MAGI is higher than these thresholds.
The IRS Publication 970, Tax Benefits for Education, details that people ineligible from claiming the tuition and fees deduction include:
- Individuals who are married and filing separately;
- If someone else can claim you as a dependent, even if they do not do so;
- If you (or your spouse) were a nonresident alien for any portion of 2019 and did not choose to be regarded as a resident alien for tax purposes.
Remember that whatever deductions you qualify for, the IRS will typically get your tax return to you within a few weeks.
Tax Reform Laws
Congress passed two tax reforms in recent years that further affect college tuition deductibles. These reforms are important to keep in mind when preparing to file your taxes.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act was a wide-ranging reform that affected multiple areas of the U.S. tax code, including education. The law now eliminates tax exemptions for dependents when calculating your taxable income and replaces them with an increased standard deduction and tax credits for children under 17. This change means that parents of undergraduates, who are typically at least 18, may end up owing more taxes.
Bipartisan Budget Act of 2018
The Bipartisan Budget Act of 2018 extended above-the-line deductions for qualified tuition costs and related expenses. The Act, similar to the Tax Cuts and Jobs Act, also leaves many previous tax deductions untouched. The first $5,250 of employer-provided tuition assistance remains tax-free, as are tuition waivers for graduate students.
Education Tax Credits
When it comes to paying for school, college students or parents of college students can also take advantage of certain educational tax credits. There are two that can reduce the amount of your income tax (as opposed to a deduction, which reduces your taxable income):
Lifetime Learning Credit
Qualified taxpayers can claim a credit of 20% of the first $10,000 of relevant educational expenses, which is a maximum of $2,000 per tax return. You can use this credit to reduce the tax you owe but will not receive it in the form of a refund.
What makes the lifetime learning credit advantageous is that you can claim it for an unlimited number of tax years. Its eligibility requirements are similar to those of the tuition and fees deduction, except that your modified adjustable gross income must be less than $68,000 if filing as a single person or $136,000 if married and filing jointly. You also cannot claim this credit if you request the American opportunity credit, but you do not need to be pursuing a degree actively.
American Opportunity Credit
The American opportunity tax credit is for qualified education expenses for an eligible student’s first four years of college. You can obtain a maximum credit of $2,500 per tax return per student. To qualify, the student must:
- Be pursuing a degree or other education credential;
- Be an undergraduate who has not completed the first four years of higher education at the start of the tax year;
- Be enrolled at least half time for at least one academic period (semester, trimester, quarter, or another period) at the beginning of the tax year;
- Not have a felony drug conviction upon the tax year’s conclusion;
- Not have claimed the American opportunity tax credit or former Hope credit for more than four tax years.
One of the key differences between the AOTC and the LLC, besides how many years in a row they can be claimed, is that the AOTC is allowed for expenses that are not paid directly to the educational institution but are required for attendance. Such costs include books, supplies, and other equipment. The AOTC is refundable up to 40% if it reduces your taxes to zero. You cannot, however, claim the tuition and fees deduction if you claim either the AOTC or LLC.
Student finances can be complicated, so it’s helpful to understand what tax deductions and credits are available to you to reduce the amount you owe or increase what you receive back.
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