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Back-to-school tax breaks

Despite being in the middle of the COVID-19 pandemic, students are going back to school this fall, either remotely or in-person. This means parents may still be eligible for certain tax breaks to help defray the cost of education.

Before we take a look at the 3 opportunities below, it is important to note: you can receive benefits from all three listed below on the same return BUT not for the same student or same qualifying expenses.

Now let’s take a look at some of the tax breaks available for education:

1. Higher education tax credits:

With the American Opportunity Tax Credit (AOTC), you can save a maximum of $2,500 from your tax bill for each full-time college or grad school student (per student per year). This applies to qualified expenses including tuition, room and board, books and computer equipment and other supplies. But the credit is phased out for moderate-to-upper income taxpayers. No credit is allowed if your modified adjusted gross income (MAGI) is over $90,000 ($180,000 for joint filers). It is also important to note that the AOTC can only be used for the first 4 years of undergraduate qualified expenses.

The Lifetime Learning Credit (LLC) is similar to the AOTC, but there are a few important distinctions. The main difference is the maximum credit is $2,000 instead of $2,500. Furthermore, this is the overall credit allowed to a taxpayer regardless of the number of students in the family (one credit amount of $2,000 per tax return). In addition, the LLC is phased out under income ranges even lower than the AOTC. You can’t claim the credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint return). The advantage to using the LLC over the AOTC is that this credit has no limit on the number of years for which it can be claimed (i.e., can be used for undergraduate and/or graduate qualified expenses).

2. Tuition-and-fees deduction.

As an alternative to either of the credits above, parents may claim an above-the-line deduction for tuition and related fees. This deduction is either $4,000 or $2,000, depending on the taxpayer’s MAGI, before it is phased out. No deduction is allowed for MAGI above $80,000 for single filers and $160,000 for joint filers. The tuition-and-fees deduction, which has been extended numerous times, is currently scheduled to expire after 2020. However, we believe it’s likely to be revived again by Congress.

In addition to these tax breaks, there are other ways to save and pay for college on a tax advantaged basis. These include using Section 529 plans and Coverdell Education Savings Accounts. There are limits on contributions to these saving vehicles.

Note: Thanks to a provision in the Tax Cuts and Jobs Act, a 529 plan can now be used to pay for up to $10,000 annually for a child’s tuition at a private or religious elementary or secondary school.

Final thoughts

Typically, parents are able to take advantage of one or more of these tax breaks, even though some benefits are phased out above certain income levels. Contact your tax professional at Wegner CPAs to maximize the tax breaks for your children’s education.

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