Changes to Education under the Tax Cuts and Jobs Act
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Are you currently attending college, have a child in college, or paying off student loans? Then you have come to the right place.We will go over key changes under the Tax Cuts and Jobs Act (TCJA) and how they relate to education and what has stayed the same. Under the new tax reform a few of the benefits for taxpayers saving for college and taxpayers paying off student loans have been modified and some have been eliminated. Good news is popular education tax benefits are unchanged like the credits and the student loan interest deduction.
What stayed the same under the new tax laws?
For students who are currently in college, the Tax Cuts and Jobs Act did not modify any of the popular education tax credits for 2018 and tax years to follow. These education credits include the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). You cannot claim the American Opportunity credit in the same year you claim the Lifetime Learning credit. The IRS only allows one tax reduction per student, per year. However, before claiming the Lifetime Learning credit, you should determine whether you qualify to take the American Opportunity credit. For most students who are in one of their first four years of post-secondary education, the American Opportunity credit can provide greater tax savings since the maximum credit is $2,500 vs $2000 for the Lifetime Learning Credit.
What is the American Opportunity Credit (AOC)?
What is the American Opportunity Credit (AOC)?
- The AOC is a credit of up to $2,500 per eligible student. Up to 40 percent of the AOC is refundable. The IRS will refund up to 40 percent of what's left over, up to a cap of $1,000. You can receive a refund of up to $1,000 even if your tax liability is zero when you file your return. It is only available for four tax years per student and is only available if the student has not completed the first four years of postsecondary education before the end of the tax year. Eligible students must be enrolled at least half-time for at least one academic period and must be pursuing a program leading to a degree or other recognized credential. There are limitations to who can get this credit depending on the taxpayers Modified Adjusted Gross Income (MAGI). The credit phases out (decreases) at certain income thresholds.
- The lifetime learning credit is a credit of up to $2,000 for qualified education expenses paid for all eligible students included on the taxpayer’s tax return. There is no limit on the number of years the lifetime learning credit can be claimed, and the student does not have to enroll in a minimum number of hours to claim the credit. The maximum credit you can claim is 20% of up to $10,000 in eligible costs or $2,000.
- Under current law, scholarships and grants remain nontaxable when applied to tuition and fees. Scholarships that can be used to pay any expense (such as room, board, text books, etc) are nontaxable when spent on qualified expenses and taxable when spent on nonqualified expenses.
- Also under current law taxpayers may take a distribution from an IRA before reaching age 59½ and not have to pay the 10% additional tax on early withdrawals if the taxpayer pays qualified education expenses for their education, spouses' education, or children. All those laws remain the same.
- The student loan interest deduction allows taxpayers to reduce their taxable income by up to $2,500. It is based on the amount of qualified student loan interest paid during the year.
What has changed under the current tax laws?
Under the new tax reform employees can no longer deduct work related education expenses. It is important to note that under the current tax laws, all types of unreimbursed employee business expenses are not allowed such as uniforms, membership in professional organizations, business related telephone and internet expenses, etc. However, self-employed taxpayers may continue to deduct qualifying education expenses on their Schedule C.
Are you currently enrolled in college or have a qualified dependent in college? We can help you find the credits and deductions for your tax returns. Call us today!