The Best Tax Benefits for Education in 2018
Most education tax benefits escaped repeal under the new tax law
While 2018 has seen significant tax law changes, educational tax breaks have largely emerged unscathed from the Tax Cuts and Jobs Act (TCJA). The Bipartisan Budget Act of 2018 stepped in to save another tax credit that would have otherwise expired.
These tax benefits include credits, deductions, and tax-free savings. Tax credits are the most beneficial because the amounts are deducted from the taxes you owe the Internal Revenue Service for the year, dollar for dollar. Deductions merely reduce your taxable income, which works out to a percentage of each dollar you can claim equal to your marginal tax bracket.
Education Tax Credits
The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC)—perhaps the best-known education tax breaks—are alive and well. Both require that you have qualified education expenses incurred at an eligible educational institution although you do not necessarily have to be the student. These credits cover your education, your spouse’s education, or your dependents’ education.
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 do not qualify.
You can claim one credit or the other, but not both in the same year, at least not for the same student. You can claim one credit for each student’s expenses, and your dependents can claim their own credits but not if you claim them as dependents on your own return.
That last rule is somewhat moot for 2018, however, because the TCJA has eliminated personal exemptions for taxpayers and their dependents.
The American Opportunity Credit
The AOC is restricted to undergraduates who are enrolled at least half-time a year. Graduate students do not qualify. The credit is equal to the first $2,000 you spend per student plus 25 percent of the next $2,000 you spend, for a maximum credit of $2,500.
The AOC begins phasing out at certain income levels. Your credit is gradually reduced if your modified adjusted gross income (MAGI) is above the first threshold, and it becomes unavailable entirely if your MAGI reaches the second threshold. These thresholds are $80,000 or less for single taxpayers in 2018, and betweeen $160,000 for married taxpayers who file joint returns.
The Lifetime Learning Credit
The LLC is open to all students, even graduate students and those who are enrolled less than half-time. It is not quite as generous as the AOC, however. This credit is equal to 20 percent of up to $10,000 in eligible education expenses or $2,000 total.
The LLC is also subject to MAGI phase-outs: $57,000 and $67,000 for single taxpayers, and $114,000 and $134,000 for married taxpayers filing jointly.
The Tuition and Fees Deduction
The tuition and fees tax deduction expired at the end of 2016, but then the Bipartisan Budget Act extended it through 2017. At the time of writing, it was unknown if other legislation would extend the tuition and fees deduction for 2018.
In 2017, this deduction could reduce your taxable income by up to $4,000, and it was one of those above-the-line deductions—an adjustment to income that you do not have to itemize to claim. You can take this deduction and claim the standard deduction or itemize your other deductions as well.
It is off limits for anyone who can be claimed as a dependent on someone else’s tax return, even if that someone else does not actually claim the dependent. The point is that the option is there. You also can't be married but must file a separate tax return.
You can't claim this deduction and one of the education tax credits also, but this deduction has somewhat higher phase-out limits than the LLC so taxpayers who do not qualify for the LLC might be able to claim this tax break instead. The phase-out thresholds in 2017 were $65,000 to $80,000 for single filers and $130,000 to $160,000 for married joint filers.
The Student Loan Interest Deduction
This deduction is restricted to single filers with MAGIs between $65,000 and $80,000 as of 2018, or $135,000 to $160,000 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. This, too, is an adjustment to income, so you can claim the standard deduction or itemize as well.
The deduction does not 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. Room and board costs can qualify under some circumstances. The student must have been enrolled at least half-time.
This one is for teachers rather than students. It is worth up to $250 of expenses you paid out of your own pocket—not a huge amount, but every dollar helps at tax time. Your school cannot have reimbursed you for those expenses. It is also an above-the-line deduction.
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 a 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 or classroom equipment, or supplies. Athletic supplies can also qualify if you teach physical education or health. If you enroll in a professional development course, you can typically deduct this cost, but certain rules apply.
Work-Related Education Costs
Individuals used to be able to claim a percentage of costs associated with going back to school for work-related purposes, but the TCJA did eliminate this deduction from 2018 through at least 2025. It was repealed along with all other work-related miscellaneous deductions.
This was not a particularly generous deduction to begin with, however. You had to itemize to claim it, and you could only claim the amount of your education expenses that exceeded 2 percent of your AGI.
College Savings Plans
Tax benefits for education are not limited to deductions and credits. The TCJA preserves tax-friendly treatment for education savings also. This includes 529 savings plans and Coverdell Education Savings Accounts.
Both types of accounts now cover elementary and secondary school expenses in addition to post-secondary school expenses thanks to the TCJA. Notably, 529 plans used to cover only college costs.
You do not have to pay income tax on money you contribute to these plans. The IRS will not 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 typically have a choice. You can pay taxes on your contributions now so distributions can later be taken tax-free. 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.
Coverdell account benefits are subject to phase-out thresholds of $95,000 for single filers and $190,000 for married taxpayers who file joint returns. You can contribute $2,000 to a Coverdell account per year per student. You cannot contribute $4,000 into two accounts for the same beneficiary because the limit is imposed per person, not per account. The beneficiary must have special needs or be younger than age 18 at the time you make contributions, and 529 savings plans do not have any contribution limits.
You cannot claim a deduction or 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 necessarily have to be spent on work-related courses.
Educational assistance programs reduce tuition in a similar way to scholarships or tuition breaks offered to school employees. These funds are generally not taxable unless they are 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 2018, but you must pay income tax on any amounts over $5,250—unless the overage is considered a “working condition fringe benefit.” Otherwise, amounts over $5,250 should appear in box 1 of your Form W-2. Fringe benefits are expenses you could have claimed a deduction for had you paid for them personally.
Unfortunately, fringe benefits also fell victim to the TCJA in 2018. They, too, were among the itemized deductions that were repealed.
Touch base with a tax professional to make sure you get the rules right if you think your benefits fall into this area.