Education tax benefits cheat sheet

August 22, 2018 : Annelise Wiens

Teachers and students are back in the classroom – and may need some education on the education tax benefits that can help them with their expenses.

Tax benefits for education, which can save students or their parents as much as $2,500, are commonly overlooked. So many taxpayers miss these benefits because of their complexity. Depending on the kind of academic program, what year the student is in, income and other factors, a student may qualify for several different tax benefits so it’s important to choose the one that maximizes tax savings.

Tax reform makes 529s more versatile

Tax reform expanded the types of expenses a 529 plan can be used to pay to include expenses for students in grades K-12 at a public, private or religious school, up to $10,000 per student. Contributions to a 529 plan aren’t deductible on a federal return, but can grow tax free until distributed. However, many states allow deductions or credits for contributions to their plans. Qualified distributions are also tax free if they are less than the beneficiary’s adjusted qualified education expenses, after accounting for other education-related tax benefits. Certain states may not allow 529 plan distributions for K-12 education expenses, so it is best to check with a tax professional about how a specific state treats such distributions.

Education tax credit eligibility alone can’t determine the best tax benefit

The Lifetime Learning credit, worth up to $2,000 per tax return, is for taxpayers who pay qualified education expenses, such as tuition and fees, for themselves, their spouses or their dependents. This credit does not require the student to pursue a degree, making this an option for anyone acquiring or improving their job skills through an eligible educational institution. More detailed eligibility requirements relate to a taxpayer’s income and filing status.

The American Opportunity credit, a credit worth up to $2,500 per student, is for taxpayers who pay qualified education expenses such as tuition and fees and purchase course materials for themselves, their spouses or their dependents. The credit has more restrictions than the Lifetime Learning Credit, but on the up side, up to $1,000 is refundable, meaning it can be claimed even if the taxpayer has no tax liability. Generally, students supported by their parents may not claim the refundable credit.

Only one Lifetime Learning Credit can be claimed each year per tax return whereas the American Opportunity Credit can be claimed for any number of eligible students. However, a taxpayer cannot claim both the Lifetime Learning and the American Opportunity credits for the same student in the same year, so taxpayers will need to study up on which credit better suits their specific situation. Proper planning can maximize educational tax benefits.

Taxpayers should keep their Form 1098-T as well as accurate records of tuition and expenses so they can claim all the benefits they’re entitled to.

Student loan interest deduction makes repaying student loans a little easier

When students start repaying their student loan, they may qualify to deduct the interest – even if they don’t itemize their deductions. The maximum $2,500 deduction is “above the line,” and may be claimed by completing the new Schedule 1 of Form 1040. This is a per tax return limitation, so married couples who are both repaying student loans cannot deduct more than $2,500 annually on their joint return.

Taxpayers can deduct student loan interest they pay on a loan they took out for themselves, their spouse or a dependent if they are the ones who are legally responsible for repaying the dependent’s loan. However, a parent cannot deduct student loan interest on a loan their child is responsible for repaying. Once the child is no longer claimed as a dependent, the child may deduct the student loan interest. If the parents make any loan payments on the child’s behalf, the payments are treated as a gift to the child and the child is treated as repaying the loan. In this situation, no one can claim the student interest deduction.

Teachers may deduct $250 for classroom supplies

Teachers for kindergarten through 12th grade can deduct up to $250 for classroom expenses, whether or not they itemize their deductions. The $250 limit is indexed for inflation.

Because of changes due to tax reform, teachers may no longer deduct some of their required continuing education expenses, or other employee business expenses, other than the $250 classroom expenses deduction.

For more information on education tax benefits, students can read IRS Publication 970 or talk to a qualified tax professional.

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Annelise Wiens

Annelise Wiens

Editor and Producer

As the newsroom editor, Annelise Wiens is interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Missouri. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.

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