The Best Education Tax Benefits for Tax Year 2019
Most education tax benefits escaped repeal under the TCJA
The IRS offers numerous education-related tax breaks, and they were largely unaffected by the Tax Cuts and Jobs Act (TCJA) in 2018. These education tax credits, deductions, and tax-free savings options remain available for you to claim in the tax year 2019, the return you'll file in 2020.
Education Tax Credits
The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) are perhaps the best-known education tax breaks, and they're alive and well in 2019. Both require that you have qualified education expenses incurred at an eligible educational institution, although you don't necessarily have to be the student. These credits cover your education, your spouse’s education, or your dependents’ educations.
The student must have a valid Social Security number or taxpayer-identification number at the time you file your tax return. The educational expenses must be paid out of your own pocket.
Tuition costs paid from nontaxable scholarships don't qualify.
You can claim the AOC or the LLC, but not both—at least not in the same year and not for the same student. You can claim one credit each for two separate students' expenses, however, and your dependents can claim their own credits—but not if you claim them as dependents on your own return.
The American Opportunity Credit
The American Opportunity Tax Credit (AOC) is restricted to undergraduates who are enrolled for at least one academic period for at least half-time a year. Graduate students don't qualify—the credit is limited to the first four years of higher education—nor do students who have felony drug convictions. The credit is equal to the first $2,000 you spend per student plus 25% of the next $2,000 you spend, for a maximum credit of $2,500.
And here's the best part. If and when your AOC erases your tax debt to the IRS, you can receive a refund of up to 40% of whatever remains, up to $1,000.
The AOC begins phasing out at certain income levels, however. These thresholds begin at modified adjusted gross incomes (MAGIs) of $80,000 or less for single taxpayers in 2019, and at $160,000 for married taxpayers who file joint returns. You can claim the full credit if your MAGI is equal to or less than these income figures, but then your credit begins decreasing and you can't claim it at all if your MAGI exceeds $90,000 or $180,000 respectively.
You can determine your MAGI for purposes of the AOC by adding back the following deductions to your adjusted gross income (AGI), which can be found at line 8b of the new Form 1040 that was introduced for the 2019 tax year:
- The foreign earned income exclusion
- The foreign housing exclusion
- The foreign housing deduction
- The exclusion from income for residents of Puerto Rico or American Samoa
Most taxpayers will find that their MAGI is the same as their AGI.
The Lifetime Learning Credit
The Lifetime Learning Credit is open to all students, even graduate students and those who are enrolled less than half-time, but it's not quite as generous as the AOC. This credit is equal to 20% of up to $10,000 in eligible education expenses, or $2,000 total. You can include your total education expenses—this one isn't per student—but you can't claim the same expenses for the AOC for that student in the same year.
The LLC is also subject to MAGI phase-outs: $58,000 and $68,000 for single taxpayers, and $116,000 and $136,000 for married taxpayers filing jointly as of the 2019 tax year, Again, it begins phasing out at the first number until it's unavailable entirely at the upper threshold.
Education-Related Tax Deductions
Tax credits are more beneficial than deductions because credits are deducted directly from the taxes you owe the IRS, dollar for dollar. Deductions reduce your taxable income, which works out to a percentage of each dollar you can claim equal to your marginal tax bracket. The less taxable income you have, the lower your marginal tax rate will be and the less you'll pay the IRS.
And all three of the available education deductions as of 2019 are better than itemized tax deductions because these come off your taxable income first as adjustments to income. The result is your AGI. And, of course, your AGI can be pivotal to being able to claim tax credits.
You can claim adjustments to income and claim the standard deduction or itemize other deductions as well.
The Student Loan Interest Deduction
This deduction phases out for single filers at MAGIs between $70,000 and $85,000 as of 2019, or $140,000 to $170,000 for those who are married and filing jointly.
You can claim up to $2,500 in interest you paid on student loans during the tax year. "Up to" means that if the interest you paid was $2,000, that's the amount of your deduction. The remaining $500 deduction is unavailable to you. Likewise, your deduction would be $2,500 if you paid $3,000 because $2,500 is the upper limit.
The deduction doesn't cover loans from employer plans or from individuals who are related to you. And, of course, you must actually have used the proceeds of the loan to fund your education or that of your spouse or dependents—you used the money to pay tuition and fees, or for books, equipment, and supplies. The student must have been enrolled at least half-time.
The Tuition and Fees Deduction
This deduction has been on-again-off-again for several years, but it's on in the tax year 2019.
The above-the-line tuition and fees adjustment to income technically expired, but then the Bipartisan Budget Act restored it in 2018. Unfortunately, it only did so retroactively through the tax year 2017. Then along came the Further Consolidated Appropriations Act of 2020, breathing new life into it through Dec. 31, 2020.
And this deduction is a good one, worth up to $4,000 off your taxable income as of 2019. The student can be you, your spouse, or your dependent. MAGI limits for this deduction are $80,000 for single and head of household filers, or $160,000 for those who are married and filing joint returns. Qualifying fees include those required for enrollment, but not room and board. Expenses for required equipment, supplies, and books are also covered.
Unfortunately, you can't claim this deduction if you file a separate married return or if you can be claimed as a dependent by another taxpayer. Nor can you claim both the tuition and fees adjustment and the American Opportunity or Lifetime Learning credits.
The Educator Expense Deduction
The educator expense deduction is for teachers rather than students. It is worth up to $250 of expenses that you paid out of your own pocket for the benefit of your students—not a huge amount, but every dollar helps at tax time. And the limit increases to $500 if you're married and filing a joint return and both you and your spouse are educators. This is also an above-the-line deduction.
Your school can't have reimbursed you for these expenses. You must teach kindergarten through 12th grade to qualify, or be a principal, aide, counselor, or instructor at an elementary or secondary school. You must work 900 or more hours during the year, and the school must be recognized under your state’s laws. Homeschooling is not covered.
Eligible expenses include money you spent on books, computer equipment, classroom equipment, or supplies. Athletic supplies can also qualify if you teach physical education or health. You can typically deduct the cost of professional development courses as well, but certain rules apply.
College Savings Plans
Tax benefits for education aren't limited to deductions and credits. The TCJA also preserves tax-friendly treatment for education savings. This includes 529 savings plans and Coverdell Education Savings Accounts.
Both types of savings plans cover elementary and secondary school expenses in addition to post-secondary school expenses, thanks to the TCJA. But this wasn't always the case. 529 plans used to cover only college costs.
Also known as qualified tuition plans, they're sponsored by education institutions and individual states under Section 529 of the Internal Revenue Code. These savings plans don't have any contribution limits.
You don't have to pay income tax on the money you contribute. The IRS won't take a bite out of this portion of your income until the money is taken back out again for education purposes. These plans act something like a tax deduction in the current year as a result. But you have a choice: You can pay taxes on your contributions now if you'd rather, so distributions can later be taken tax-free.
Earnings grow tax-free, provided they're used for qualified education expenses. You'll have to pay taxes on the growth and there may be penalties if you use the money for any other purpose.
Coverdell Education Savings Accounts
Growth on the money deposited in Coverdell accounts is typically taxed at the time of distribution unless the distributions are less than the student’s actual expenses.
These account benefits are subject to phase-out thresholds of $110,000 for single filers and $220,000 for married taxpayers who file joint returns as of the tax year 2019. You can contribute up to $2,000 to a Coverdell account per year per student, but you can't contribute $4,000 into two accounts for the same beneficiary because the limit is imposed per person.
The beneficiary must have special needs or be younger than age 18 at the time you make the contributions.
You can't claim an education-related tax deduction or tax credit for expenses paid from college savings plans.
Educational Assistance Benefits and Programs
Educational assistance benefits are amounts paid by your employer for your education. The benefits must typically be used toward tuition, fees, equipment, books, or supplies, either at the undergraduate or graduate student level. The money does not have to be spent on work-related courses.
Educational assistance programs reduce tuition in a way similar to scholarships or tuition breaks offered to school employees. These funds are generally not taxable unless they're provided in exchange for work or services and, even then, some exceptions apply.
Up to $5,250 of education assistance benefits are yours tax-free in the tax year 2019, but you must pay income tax on any amounts you receive over $5,250. Amounts over this threshold should appear in box 1 of your Form W-2, along with your other income.
Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.