The topic of whether or not educational expenses can be deducted from taxable income is a common one for both students and their parents. Unfortunately, no one can deduct educational expenses from their taxable income thanks to a policy established by the Internal Revenue Service.

For those whose annual income is below a specific threshold, however, the federal government does provide tax credits to help defray the cost of a college education in the United States. A college or higher education tax credit is offered instead of a deduction.

Is College Tuition Tax Deductible?

For qualified students, the IRS began allowing a tax deduction for tuition and fees in 2002. Over the next two decades, students were granted an increased deduction of up to $4,000 thanks to multiple extensions and renewals of the original provision.

The deadline for claiming this deduction was December 31, 2020; thus, there would be no tax savings from paying for college in 2021. Although students will no longer be able to take advantage of this perk, they may save money on taxes before, during, and after their time in school by using alternative strategies.

What Are Students Tax Credits?

The federal government provides several tax credits and deductions to facilitate college savings and debt repayment. In this category are tax credits and other exemptions. It's important to note that tax credits reduce your tax liability rather than your taxable income. Tax credits are more helpful than deductions when decreasing your tax bill to zero.

The two most important tax breaks for higher education are the AOTC and the LLC. However, other tax credits, such as the Earned Income Tax Credit, may apply to your or your child's higher education costs, depending on your circumstances.

What Are Student Tax Deductions?

Federal tax deductions are another tax relief the government grants to promote college savings. If you take advantage of deductions, you can avoid paying tax on a portion of your income rather than the full amount.

Tax deductions, while not as advantageous as tax credits, can substantially reduce the amount of tax you owe. It frees up more cash that can be placed toward retirement, a child's education fund, or anything else you desire! By reducing your taxable income with the help of tax deductions, you may be eligible for additional tax credits and deductions.

How Much College Tuition Is Tax Deductible?

The Further Consolidated Appropriations Act previously allowed a tax deduction for educational expenses. Taxpayers who met the requirements could deduct up to $4,000 in qualified school costs under this provision and in past years. Tuition and fee deductions are no longer allowed due to the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Section 104 of House Bill 133, passed by Congress, did away with the deduction for tuition expenses beginning with the 2018 tax return filing season. The measure permitted taxpayers to file amended returns for prior years to claim the deduction for educational expenses.

Your tax amount might have been lowered by $4000 or $2000 if you filed an updated return for 2020 or 2019. You could take a tax deduction of a certain percentage of your MAGI or adjusted gross income. Claiming this deduction required filing Form 8917.

Is College Tuition Tax Deductible For Parents?

Students and their parents can use the AOTC and the LLC to help pay for higher education expenses. Both can be deducted using the student's Form 1098-T and the accompanying information on Form 8863. One of these tax credits can only be used once every tax year, so choose carefully. College costs may potentially qualify for the earned income tax credit.

Is Paying Someone Else Tuition Tax Deductible?

Up to $4,000 per year in tuition and fees are tax deductible thanks to the tuition and fees deduction. As long as you're the one footing the bill, tuition qualifies as a tax-deductible expense; if it's covered by a tax-free scholarship, grant, or fellowship, it doesn't. Due to its nature as an adjustment to income, this deduction is available even if you don't itemize.

If your MAGI is more than $80,000 (single) or $160,000 (married filing jointly), If you meet the criteria to be included as a dependent on another taxpayer's return, if you claim another tuition tax credit, or if you are divorced or legally separated, you are not eligible to claim the tuition and fees deduction.

What Is American Opportunity Tax Credit?

In the first four years of higher education, the American Opportunity Tax Credit (AOTC) awards a maximum annual credit of $2,500 per qualified student. Tuition, fees, and textbooks may qualify for this program's reimbursement. It is important to remember that living costs, transportation costs, medical bills, insurance premiums, and optional fees are not deductible.

Each eligible student can claim a credit equal to 25% of the next $2,000 in qualified education expenses paid after the initial $2,000 has been fully covered. If your total qualified school costs are $4,000 or more, you will be eligible for the maximum credit of $2,50.

With the AOTC, you can get a refund of up to 40%, a huge bonus. An additional 40% credit, up to $1,000, may be available if your tax bill is zero after applying for the credit. Students must be enrolled at an accredited post-secondary institution for at least half of each semester during that tax year and be studying toward a degree or other credential widely recognized in the field to qualify for the AOTC.

Conclusion:

As of 2020, taxpayers will no longer be allowed to deduct the cost of higher education expenses. Other tax credits, such as the American Opportunity Tax Credit and the LLC, might still help cover the cost of higher education. Graduates are eligible to deduct the interest they pay on their student loans.