The sweeping changes of the Tax Cuts and Jobs Act of 2017 (TCJA) spared the major higher education tax credits. If you or your dependent attend college this year or you have been making payments on student loans, there are still credits and other deductions you for which you may be eligible.
Student Loan Interest
The extension on the Tuition and Fees Deduction that expired at the end of 2017 has not been renewed, but the above-the-line deduction on student loan interest made it through the TCJA intact. You may deduct up to $2500 of interest you paid on a qualified student loan.
To be eligible, your modified adjusted gross income (MAGI) must be less than $160,000 for joint filers. The loan must have been used to pay for qualifying education expenses. If you’ve paid $600 or more in interest this year you should receive Form 1098-E, Student Loan Interest Statement, from your loan servicer.
The two major higher education credits were left largely untouched by the tax reform bill.
To be eligible for these credits, you must meet three criteria:
- You, your dependent, or someone else paid qualified education expenses for higher education (qualified expenses do not include room and board, transportation, insurance, and some fees)
- The student is enrolled at an eligible post-secondary institution
- The student is yourself, your spouse, or a dependent you claim on your tax return
American Opportunity Tax Credit
The AOTC is a credit for expenses paid for an eligible student during the first 4 years of post-secondary education. You can claim a maximum annual credit $2500 per student, with 40% of the remaining credit up to $1000 being refundable. Phase out begins at a MAGI of $80,000 for single filers and $160,000 for joint filers.
To be eligible the student must:
- Be pursuing a degree or recognized credential
- Be enrolled at least have time for at least one academic period that started in the tax year
- Not have completed four years at the beginning of the tax year
- Not have claimed the AOTC or former Hope Credit for more than four years
- Not have a felony drug conviction at the end of the tax year
Lifetime Learning Credit
The LLC is a credit to help offset costs for undergraduate, graduate, and professional degree courses. It is worth 20% of the first $10,000 in qualified expenses (up to $2000 per return) and there is no limit on the number of years a credit may be claimed. The LLC is a nonrefundable credit. Phaseout begins at a MAGI of $57,000 for single filers and $114,000 for joint filers.
To be eligible the student must:
- Be enrolled or taking courses at an eligible institution
- Be taking courses towards a degree or other credential or to improve job skills
- Be enrolled for at least one academic period beginning in the tax year
It is possible to claim both credits on the same tax return, but they cannot be claimed for the same student and the same expenses. Some tax-free assistance, like a grant, must be subtracted from your qualified education expenses. You will generally receive Form 1098-T by January 31st that you can use to calculate the total of your qualified expenses for both credits.
Tax Advantaged Savings
Connecticut taxpayers can deduct their CHET 529 account contributions (up to $10,000 for joint filers) on their state income taxes. There’s no federal deductions for contributions, but your earnings are tax-free when they are withdrawn for qualifying education expenses.
Coverdell Education Savings Accounts
A Coverdell ESA does not have tax benefits at the state level, but your earnings are free from income tax when withdrawn for qualifying education expenses.
For more information on how your student expenses will affect your tax liability, see the IRS Tax Benefits for Education Information Center.
Scholarships and Grants
The TCJA did not make changes to the rules for fellowships, scholarships, and grants. In general, whether these are taxable as income depends on whether they were used on qualified education expenses.
Qualified expenses (non-taxable):
- Tuition and fees
- Required course-related expenses (textbooks, supplies, and equipment)
Not qualified expenses (taxable):
- Room and board
- Personal living expenses
- Medical expenses
- Clerical help
- Equipment not required by a course
Please bring your 1098-E and/or your 1098-T to your tax preparation appointment. We also require an accounting transcript from the school, receipts of any qualified education expenses, and records of any scholarships, grants, or fellowships received to be able to file your return. If you are a client with questions give us a call at 860-216-2195 or email your personal tax professional.
Kids not quite ready for college? Check out the TCJA updates to the Child Tax Credit.