September 17, 2019   //   Tax   //   By PKF Mueller Solutions


It costs a pretty penny to send a child to college or private school these days. But at least the federal tax code may provide some relief, within certain limits.

Can you take advantage of one or more of the six following education-related tax breaks?

1. American Opportunity Tax Credit (AOTC). The tax law provides a maximum $2,500 credit for qualified expenses of each qualified student in your family. For example, if you have three kids in school at the same time, you may take a maximum credit of $7,500 in that year. Also, under a recent law change, the AOTC now applies to the first four years of a student’s college education, instead of just two.

However, the AOTC is subject to a phaseout, based on modified adjusted gross income (MAGI). Currently, the phaseout range is between $80,000 to $90,000 of MAGI for single filers and $160,000 to $180,000 for joint filers. Once you exceed the upper limit, you can’t claim the AOTC.

2. Lifetime Learning Credit (LLC). Unlike the AOTC, the maximum LLC of $2,000 is applied on a per-taxpayer basis, not on the number of students. Thus, if you have three children in school at the same time, the annual credit is still $2,000.

In addition, the LLC is also phased out, at levels lower than the AOTC. For 2019, the phase-out range is between $58,000 to $68,000 of MAGI for single filers and $116,000 to $136,000 for joint filers. For these reasons, the AOTC is usually preferred over the LLC.

Generally, you can claim either the AOTC and the LLC, but not both. Make this choice on the tax return for the year expenses are incurred.

3. Section 529 plans. These plans, which are operated by the individual states, encourage families to set aside funds for future expenses. The contribution limit is usually at least $300,000. Generally, the investment grows without any current tax erosion, while distributions used for qualified college expenses — including tuition, fees, books, supplies, equipment, and room and board for full-time students — are completely tax-free.

Thanks to a provision in the Tax Cuts and Jobs Act (TCJA), a Section 529 plan can now be used for kindergarten through high school as well, for distributions after 2017. This benefits parents sending children to private schools. However, the TCJA limits this tax break to $10,000 annually.

4. Student loan interest deduction. If you’re paying back a student loan, you can deduct the annual interest paid on the loan, up to a maximum of $2,500 for the year. Note that this “above-the-line deduction” can only be claimed by the taxpayer obligated to repay the loan.

Furthermore, the deduction for student loan interest is phased out based on MAGI. Currently, the phase-out range for single filers is between $65,000 and $80,000 of MAGI and between $130,000 and $160,000 of MAGI for joint filers.

5. A Coverdell Educations Savings Account (CESA). Annual contributions to a CESA are limited to $2,000. Obviously, this is on the low side, especially when compared to Section 529 plans allowing six-figure contributions. Nevertheless, there’s no current tax on earnings and you can withdraw amounts tax-free to pay for qualified expenses like tuition and fees, room and board, uniforms, transportation, books and supplies, academic tutoring and computers.

The ability to make CESA contributions is also phased out. Currently, the phase-out range for single filers is between $95,000 and $110,000 of MAGI and between $190,000 and $220,000 of MAGI for joint filers. Extra benefit: A CESA is allowed to cover costs from K-12th grade as well as college.

6. Scholarships. Under the tax law, scholarships or fellowships are exempt from tax if you’re a degree candidate at an eligible educational institution to the extent that—

  • They don’t exceed your expenses,
  • They aren’t designated or earmarked for other purposes (such as room and board), and
  • They don’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship (unless an exception applies).

The tax exemption only applies to amounts used for qualified expenses. Otherwise, a scholarship or fellowship is taxable.

For this purpose, a student is treated as a candidate for a degree if he or she:

  • Attends a primary or secondary school or is pursuing a degree at a college or university, or
  • Attends an accredited educational institution that provides a program acceptable for full credit toward a bachelor’s or higher degree, or offers a program of training preparing students for gainful employment in a recognized occupation.

These education tax breaks are ripe for the taking in 2019, but one other benefit is on hold. Previously, you could claim a tuition-and-fees deduction of up to $4,000, subject to a phase-out, in lieu of a higher education credit. But the write-off technically expired after 2017. This tax break may be revived in a package of tax law extenders if Congress acts on it. Watch out for new developments.