There are a few tax benefits available to offset the costs of qualified education expenses. The American Opportunity Credit and the Lifetime Learning Credit are two tax credits that can reduce the amount of tax you owe, dollar for dollar, while the Tuition and Fees Deduction reduces your taxable income. When you qualify for more than one of these education tax benefits, you are allowed to claim the one that benefits you the most. This article explores the Tuition and Fees Deduction.
A tax deduction for qualified tuition expenses has generally been available for many years. However, it has never been a permanent part of the tax code, so whether it’s available from year to year is always an open question. Typically, up to a $4,000 deduction has been allowed for those who meet all the requirements, discussed below.
This deduction generally expires every few years.
Amongst a list of other tax benefits, the Tuition and Fees Deduction has generally expired every few years. These expiring provisions are known as “extenders” because they have a set expiration date and are therefore not considered permanent in the tax code. If Congress doesn’t approve an extension on the benefit, the benefit is no longer available. Every few years, an extender bill passes, allowing the deduction for the next year or two. In some years, the extender bill has passed well before the expiration dates, but in other years it has been a very last-minute decision. For example, when the Tuition and Fees Deduction expired at the end of 2016, it was not extended again until February 2018. Even then, it was only given a one-year extension from December 31, 2016, until it was going to expire again on December 31, 2017. And indeed, the Tuition and Fees Deduction was again allowed to expire at the end of 2017.
Is the Tuition and Fees Deduction available for 2020? Yes, it is. During 2018, tax professionals wondered whether Congress would revisit the extenders. Even as taxpayers filed their 2018 tax returns in early 2019, no action to extend the tax provision had happened. Finally, in late 2019, legislators passed a bill that extended the Tuition and Fees Deduction for another three years, making it retroactive for 2018, and allowing it for 2019 and 2020. Now the extension is set to expire again on December 31, 2020. So, if you meet the qualifications for the Tuition and Fees Deduction, you can reduce your taxable income by up to $4,000 for the tax year 2020. If you could have claimed the Tuition and Fees Deduction for 2018 or 2019, you still have time to amend your returns for those years to claim the deduction.
Not all Educational Institutions are eligible.
It is imperative to understand that not all types of tuition will qualify for the Tuition and Fees Deduction. Tuition paid for primary, elementary, and high school education at private institutions is not eligible. Only the qualifying expenses paid to an eligible educational institution are acceptable. In general, tuition paid to colleges, universities, vocational schools, and other post-secondary institutions are acceptable. These educational institutions must be accredited, but it does not matter if they are public, private, or nonprofit institutions. One indication that an institution is acceptable is that it participates in the Department of Education student aid program. The Department of Education provides aid to some institutions located outside the United States, but most eligible educational institutions are inside the United States.
Eligible institutions are now required to issue the student a Form 1098-T, indicating the amount received as payment for qualifying education expenses. The student generally must have the Form 1098-T to claim the deduction. The institution must provide the form by January 31 of the following year. Due to privacy laws, the student gets the 1098-T no matter who paid the expenses. Thus, a taxpayer must request that their spouse or dependent provide them a copy of the form to prepare their tax return.
Under certain circumstances, such as the following, eligible institutions may not be required to issue the Form 1098-T:
- a student is a nonresident alien,
- a student has qualified education expenses paid entirely with scholarships or has qualified education expenses paid under a formal billing arrangement
Taxpayers may still be allowed a deduction if they demonstrate the student enrollment was at an eligible institution and provide the necessary substantiation of the payments.
Who can claim the deduction?
Taxpayers must consider who paid the college expenses as well as who received the education. Generally, taxpayers are allowed a deduction for qualifying expenses paid for their own education, as well as the costs of a spouse or a dependent’s education. Guidelines concerning the timing of the payments for an eligible student’s tuition exist. In most cases, the expenses claimed must be paid for the year deducted. There is an exception for payments made to cover costs for the academic period that begins in the first three (3) months of the subsequent year. An example is when a college bills you in December for the next semester that starts in January (or not later than March). Often, the college receives payment before the end of December in that current year.
There are income limitations and filing status limitations as well, so having qualifying education expenses alone does not automatically mean a deduction is allowed. If you file a tax return using the married filing separately filing status, the Tuition and Fees Deduction is not allowed. If your modified adjusted gross income (MAGI) is above $80,000 and you file single or head of household, or $160,000 if you are married and filing jointly, you will not be allowed the deduction. A nonresident alien who has not elected to be treated as a resident alien (for tax purposes) cannot take the deduction.
Additionally, you cannot claim the Tuition and Fees Deduction for yourself, your spouse, or your dependent if you claimed an American Opportunity Credit or Lifetime Learning Credit for that person. In other words, any individual can take the deduction or one of the two education credits, but you cannot claim both. The best approach is to take the time to evaluate your options and use whichever benefit yields the biggest tax benefit to you.