The Tax Cuts and Jobs Act (TCJA) enacted many changes that affect individual taxpayers. With regards to tax breaks for higher education, the TCJA brought few changes, merely tweaking existing provisions. An experienced tax accounting firm can help you understand if the TCJA changes your tax situation. Check out the key details of education-related tax breaks for the 2018 tax year and beyond.
The Elimination of Employee Deductions for Job-Related Education Costs
The Tax Cuts and Jobs Act (TCJA) eliminates itemized deductions for miscellaneous expenses incurred for job-related education. Most taxpayers did not qualify for this deduction due to the requirement that the expenses exceed 2 percent of their adjusted gross income (AGI). This change takes effect for the 2018 tax year and lasts through the 2025 tax year.
Under the previous law, to claim these expenses, the education had to maintain or improve skills used in your current job or profession (such as an MBA degree). Taxpayers were not eligible to claim expenses covered by their employers.
Exceptions for Self-Employed Tax Payers
If you’re self-employed, you can still deduct job-related education expenses that improve or maintain skills related to your current business. Taxpayers who are interested in deducting job-related education expenses should consult a tax accounting firm to determine their eligibility.
Education Tax Credits
Education tax credits are a valuable benefit for families with students pursuing higher education. The TCJA retains two tax credits for higher education costs.
1. American Opportunity Credit
The American Opportunity credit equals 100% of the first $2,000 of qualified post-secondary education expenses, plus 25% of the next $2,000 (subject to the phaseout rule). Its annual max is $2,500 per tax year. To use the American Opportunity tax credit, the student must attend at least half of a full-time course load for one academic period. The student may pursue an Associate’s degree, Bachelor’s degree or other recognized credential. As of the 2018 tax year, the American Opportunity credit is phased out if your modified adjusted gross income (MAGI) is between:
$80,000 and $90,000 for single taxpayers, or
$160,000 and $180,000 for married joint filers.
If you or your dependent student has completed four years of undergraduate college work, you do not qualify for the American Opportunity tax credit.
2. Lifetime Learning Credit
The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses, maxing out at $2,000. It is ideal for students with light course loads or for those who have exhausted the American Opportunity credit. You can also use this credit for graduate school. For the 2018 tax year, the Lifetime Learning credit is phased out if your MAGI is between:
$57,000 and $67,000 for single taxpayers, or
$114,000 and $134,000 for married joint filers.
Families who aren’t sure which tax credit they meet the eligibility requirements for should consult with a tax accounting firm. Both credits have multiple regulations, such as the requirement that the student attend an accredited institution. Both credits are available for expenses incurred for you, your spouse and your dependent children. Qualified expenses include tuition, enrollment fees and required course materials – including books. Room and board costs and optional fees (such fees for student activities or health insurance) don’t qualify.
Other Factors to Consider
Taxpayers who are married but don’t file jointly are ineligible for both the American Opportunity and Lifetime Learning credits. You can only claim one Lifetime Learning credit on your tax return, even if multiple family members are pursuing higher education. It is not possible to claim both tax credits for the same student. However, you might have the option to claim the American Opportunity credit for one student and the Lifetime Learning credit for another. Discuss this possibility with a tax accounting firm.
If your student has income, have your tax accounting firm run the numbers to see if you or your student should take the tax credit. Families subject to the phaseout rules may find that it is financially beneficial to have the student claim him or herself and the education credit.
The Tuition and Fees Deduction
In addition to the American Opportunity and Lifetime Learning tax credits, you have the option to take a deduction for tuition and fees paid for higher education. This is an “above-the line” deduction, meaning that you don’t have to itemize to claim it. For the 2017 tax year, if you were unmarried with a MAGI of $65,000 or less (or married filing jointly with a MAGI of $130,000 or less), the tuition and fees deduction equaled the lesser of: $4,000 or 100% of eligible expenses. If you were unmarried with a MAGI between $65,001 and $80,000 (or married filing jointly with a MAGI between $130,001 and $160,000), the maximum deduction was the lesser, $2,000 or 100% of eligible expenses.
Single people with MAGI above $80,000 (or married people filing jointly with MAGI above $160,000) were ineligible for this deduction for 2017. Though this deduction expired in 2017, it is one that Congress typically renews at the end of each year. You can’t claim the tuition deduction in conjunction with an education credit for the same student. Meet with your tax accounting firm to determine which option will benefit you the most.
If your family has multiple students, you have the option to take the tuition deduction for one student’s expenses and a tax credit for another student’s expenses. Married tax payers must file jointly to qualify for the tuition deduction.
Eligible expenses for the tuition deduction include tuition at a qualifying institution and mandatory enrollment fees and course materials (including books and supplies). However, you can only deduct materials if you are required to purchase them directly from the school. Room and board costs and optional fees are not eligible.
If the deduction is resurrected for 2018, you can claim eligible expenses that are paid in 2018 for courses that begin in 2018 or that begin in January through March of 2019. Prepaying expenses due in early 2019 could lower your 2018 tax bill. Ask your tax accounting firm about the benefits of prepaying your education expenses.
The Student Loan Interest Deduction
If you pay interest on education loans, you may be eligible to claim an above-the-line deduction. The maximum annual write-off is $2,500. To qualify, the student debt must have been taken out within a reasonable time before or after eligible higher education expenses were incurred. Eligible expenses include tuition, fees, room and board, and related costs (such as books and supplies) to attend an accredited educational institution.
This deduction is permitted for expenses from an academic year where the student attended at least half-time. The academic program needs to lead to an Associate’s degree, Bachelor’s degree or other recognized credential. For the 2018 tax year, the deduction is phased out for unmarried taxpayers with a MAGI between $65,000 and $80,000. The phaseout range occurs with a MAGI between $135,000 and $165,000 for joint filers. Married individuals who file separate returns are ineligible.
Contact Our Tax Accounting Firm
Not sure which tax breaks you are eligible for? Consult with a tax accounting firm that will evaluate your entire financial situation and help you achieve the most tax savings for your education expenses. Contact Fair, Anderson & Langerman today at 702-870-7999.