The IRS offers numerous education-related tax breaks for tax year 2020 (the return you file in 2021). These include tax credits, deductions, and tax-free savings options. But the IRS doesn’t generally allow you to take more than one benefit per student per year. Know which are available to you and their differences so you can select the best one to claim.
Education Tax Credits
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) both require that you have qualified education expenses at an eligible institution for your education, your spouse’s education, or your dependent’s education. The student for whom the credit is claimed must have a valid Social Security number or taxpayer-identification number (TIN) at the time you file your tax return.
Tuition costs paid from nontaxable scholarships don't qualify: To qualify for either credit, educational expenses must be paid out of your own pocket.
You can claim the AOTC or the LLC, but not both—at least not in the same year for the same student. To claim the credit, you can not be listed as a dependent on someone else’s return or file as married filing separately.
The American Opportunity Credit
The American Opportunity Tax Credit (AOTC) is restricted to undergraduates who are enrolled at least half-time for at least one academic period. Graduate students don't qualify, nor do students who have a felony drug conviction. The credit is partially refundable and 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. To be eligible for the credit, you cannot have claimed it (or the former Hope credit) for the same student for more than four years.
If the credit reduces the amount of tax you owe to zero, you will receive 40% of any remaining tax credit up to a maximum of $1,000 as a refund.
The AOTC begins to phase out at modified adjusted gross incomes (MAGIs) of $80,000 for single and head of household taxpayers, 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. If MAGI exceeds $90,000 or $180,000, respectively, you can’t claim the credit.
For most taxpayers, MAGI is the same as adjusted gross income (AGI), or line 11 of the 2020 Form 1040. You can determine your MAGI for purposes of the AOTC by adding back the following deductions to your AGI:
- 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.
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 AOTC. This credit is equal to 20% of eligible education expenses up to $10,000, or $2,000 total. Unlike the AOTC, it’s not refundable. You can include your total education expenses—this one isn't per student—but you can't claim expenses already claimed for the AOC.
The LLC is also subject to income phase-outs: It begins to reduce for MAGIs above $59,000 for single and head of household taxpayers, and $118,000 for married taxpayers filing jointly. After MAGIs of $69,000 and $138,000, respectively, the credit phases out entirely.
Education-Related Tax Deductions
Tax credits are more beneficial than deductions because credits are deducted directly from the tax you owe, dollar for dollar. Deductions reduce your taxable income and so only reduce a fraction of the tax you owe. In other words, it generally makes sense to claim a credit instead of a deduction when possible.
But all three of the available education deductions for 2020 are better than itemized tax deductions because they are “above the line,” meaning they reduce your AGI before you claim the standard deduction or itemize additional deductions.
The Student Loan Interest Deduction
You can claim up to $2,500 in interest you paid on student loans during the tax year.
This deduction phases out based on income. Single and head of household filers with a MAGI below $70,000 and married taxpayers filing jointly with a MAGI below $140,000 qualify for the full deduction.
The deduction doesn't cover loans from employer plans or from individuals who are related to you, and you must have used the loan to fund education expenses for yourself, your spouse, or dependents (including, in some cases, someone you could have claimed as a dependent). Education expenses include tuition and fees, 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 for tax year 2020. It’s worth up to $4,000 off your taxable income. 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 tax credit 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. 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, and 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 at least 900 hours during the academic year; 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. Disinfectant supplies and personal protective equipment you purchased after March 12, 2020 also qualify.
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: Tax-friendly treatment also applies to some education savings plans. This includes 529 plans and Coverdell Education Savings Accounts.
Both types of savings plans cover elementary and secondary school expenses in addition to post-secondary school expenses (529 plans used to cover only college costs).
Also known as qualified tuition plans (QTPs), 529 plans are sponsored by education institutions and individual states under Section 529 of the Internal Revenue Code. These savings plans don't have income limits regarding who can contribute, and contributions are limited to no “more than the amount necessary to provide for the qualified education expenses of the beneficiary.” Contributions may be deductible at the state level, but not on your federal return.
Contributions can be invested and earnings grow tax-free, provided they're used for qualified education expenses.
Coverdell Education Savings Accounts
Earnings in Coverdell Education Savings Accounts are also tax-free up to the amount that they’re used to pay for qualifying education expenses. Like 529 plans, contributions can be invested and aren’t deductible. However, total contributions per student can’t exceed $2,000 per year—even if multiple people contribute or if that student has more than one Coverdell account.
Also unlike 529 plans, income limits apply to contributors. MAGI must be less than $110,000 for single and head of household filers to contribute, and less than $220,000 for married taxpayers filing jointly. The contribution amount begins to phase out if MAGI is above $95,000 for single and head of household filers, or $190,000 for married taxpayers filing jointly.
The beneficiary must be younger than age 18 or have special needs at the time contributions are made.
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 level. The money does not have to be spent on work-related courses or courses that are part of a degree program.
Up to $5,250 of education assistance benefits are yours tax-free in tax year 2020, but you must pay income tax on any amounts you receive over $5,250.
Any tax-free education expenses received from your employer can’t be used to claim any other tax credit or deduction.
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.