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Educate yourself about the revised tax benefits for higher education

3/22/2021

Going to college is one of the biggest financial investments you’ll make. Wouldn’t it be great to see some returns on it before graduation? 415 Group Senior Manager Brian Raber, CPA, MT, explains how education tax credits can make a difference on your tax returns. 

By
CPA, MT

When it comes to the changes in higher education tax credits and deductions, along with the differences between them, you want to choose the option that works best for you. Combined with scholarships and other financial incentives, they make tuition a little more affordable.

Each year, you’ll want to decide which is better for you to take advantage of: the American Opportunity Tax Credit or the Lifetime Learning Credit. Often, if students are eligible for the American Opportunity Tax Credit—which is more restrictive—they will use that credit for the first four years, and then switch to the Lifetime Learning Credit beyond that.

The American Opportunity Tax Credit requires students to be pursuing a degree within their first four years of college to qualify. Other stipulations include students being enrolled at least halftime and not having any felony convictions.

For the Lifetime Learning Credit, as long as a student is taking higher education courses, they will most likely qualify for the tax break. This could be a great opportunity for those wanting to continue their education right after graduating or even later in life.

Wondering what happens if your parents are paying for college? If you’re listed as a dependent on their tax returns, they can take advantage of these credits. There could be some issues if your grandparents or someone else is paying for your education—for example, the funding could be categorized as a gift if it’s not paid directly to the college.

With the Consolidated Appropriations Act, the modified adjusted gross income (MAGI) amount for the Lifetime Learning Credit was increased to match the American Opportunity Tax Credit’s level. Going forward, the two credits will be more comparable.

The act also removed the Tuition and Fees Deduction after 2020. This had been confusing for those filing taxes on their own, because a $4,000 deduction can initially sound better than a $2,000 or $2,500 credit. A credit is a dollar-for-dollar reduction of the income tax owed, while a deduction only lowers taxable income. In a lot of cases, people weren’t optimizing their credits and deductions and therefore not getting the most out of them.

This is why it’s so important to work with a trusted advisor. They can look at the various education tax credits and deductions, compare them with your situation, and find the best fit. Accountants such as those at 415 Group can help you get the most tax savings.

Contact us today for more information on American Opportunity Tax Credit, Lifetime Learning Credit, and other education tax opportunities.

Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.

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