Back-to-school tax breaks on the books

tax break on books

COVID-19 hasn’t gone anywhere, but that isn’t stopping students from starting college. The start of the school year is attended by both the usual discussions – schedules, homework, back-to-school purchases – and the unusual – public health safety precautions, online learning. As parents work to make sure their children are set up for success, they should keep one thing in mind: the availability of tax breaks to offset educational expenses. 

Tax credits for higher education

There are two available tax credits that parents can claim for higher education. Typically, only one can be claimed. 

American Opportunity Tax Credit (AOTC)

This tax credit allows parents to save up to $2,500 per each full-time undergraduate or graduate college student. Eligible costs include tuition, room and board, books, computers, and related supplies. However, for middle and upper income taxpayers, the credit is gradually phased out and no credit is allowed if the household’s modified adjusted gross income (MAGI) exceeds $90,000 for individual filers or $180,000 for joint filers. 

Lifetime Learning Credit (LLC)

This tax credit bears some similarities to the AOTC, but there are several key differences. For the LLC, the maximum credit is $2,000, not $2,500. Moreover, the credit doesn’t apply for each student in the family – $2,000 is the total allowable amount. Additionally, LLC can’t be claimed if a family’s MAGI is above $68,000 for individual filers or $136,000 for joint filers. 

Given the greater flexibility of AOTC, it’s the preferred tax credit for families with students in higher education. However, there are more options out there. 

Tuition-and-fees deductions

If tax credits aren’t the best option for families, parents can instead claim above-the-line deductions for tuition and feeds. Depending on the taxpayer’s MAGI, the deduction will either be $2,000 or $4,000. This deduction is phased out for taxpayers with MAGI over $80,000 individual filers or $160,000 for joint filers. 

As of writing, the tuition-and-fees deduction is set to expire at the end of 2020. However, it has a history of being extended by Congress, so it’s likely to be renewed again.  

Beyond tax breaks, parents can plan to save and pay for college in a way that puts them at a tax advantage. Two popular options are the Section 529 plan and Coverdell Education Savings Accounts, although parents should consider the limitations put on these methods in addition to the tax benefits. 

As a side note, a 529 plan can be used for more than higher education; it can pay for up to $10,000 a year for tuition at private or religious elementary and secondary schools. 

Final notes

While these tax breaks and plans have their limits, they provide much-needed help for parents in covering the high costs of higher education. To learn more about how you can maximize your budget and your tax breaks for your student’s education, contact Smolin Lupin today.