The Best Tax Benefits for Education in 2019
Most education tax benefits escaped repeal under the new tax law
Although 2018 was a year of some very significant tax law changes, educational tax breaks emerged largely unscathed by the Tax Cuts and Jobs Act (TCJA). Then the Bipartisan Budget Act of 2018 stepped in to save another tax credit that would otherwise have 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 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 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.
The American Opportunity Credit
The American Opportunity Tax Credit 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, nor do students who have a felony drug conviction. 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.
And here's the best part. If and when your AOC erases your tax debt to the IRS, you can receive up to 40% of whatever is remaining as a tax refund, up to $1,000.
You can determine your MAGI for purposes of the AOC by adding back the following deductions to your adjusted gross income (AGI), found on line 7 of the new Form 1040 that was introduced for the 2018 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 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. Then your credit begins decreasing, and you can't claim the credit at all if your MAGI exceeds $90,000 or $180,000 respectively.
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 percent 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.
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.
You can't claim the LLC if your income is $67,000 or more, or $134,000 or more, depending on your filing status
The Student Loan Interest Deduction
This deduction is limited to single filers with MAGIs between $65,000 and $80,000 as of 2019, 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 is an adjustment to income, so you can claim it then 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. The student must have been enrolled at least half-time.
The Bipartisan Budget Act of 2018 also restored the above-the-line tuition and fees deduction, but unfortunately, it only did so through the tax year 2017. As of April 2019, this deduction has not been renewed for the tax year 2018 or going forward, but keep an eye on this one because it's died and come back to life before.
The Educator Expense Deduction
The Educator Expense deduction 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 can't have reimbursed you for these 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 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 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, too, but certain rules apply.
College Savings Plans—529 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. These savings plans don't have any contribution limits.
You don't have to pay income tax on the money you contribute to either of these plans. 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 typically have a choice. You can pay taxes on your contributions now if you'd rather 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. These
These 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 up to $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.
You cannot claim a tax 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. Amounts over $5,250 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.