When you’re putting yourself or a child through college, saving money is important. While cutting on basics can be tough, parents or students may qualify to save money on their taxes.
The education tuition and fees deduction allows eligible taxpayers to deduct up to $4,000 from their income.
Even though this deduction originally expired at the end of 2017, it has been extended through 2020 (and honestly, some variation will likely continue into the future as well - it's a very popular program). That means parents and students should check whether claiming the deduction lowers their tax bill this year.
What Is The Tuition And Fees Deduction?
The education tuition and fees deduction is an aptly named tax deduction. Taxpayers who pay for tuition or eligible expenses may qualify to deduct up to $4,000 from taxable income from their adjusted gross income. And when you “lower” your income through tax deductions, you pay less in taxes overall.
This particular tax break is an “above the line” deduction. That means you don’t need to itemize your tax deductions to claim it. If you have eligible expenses, the deduction allows you to lower your taxable income by $4,000.
Assuming you have a 24% marginal tax rate, a $4,000 deduction is worth $960 in tax savings. However, it's important to note that the education tuition and fees deduction is set to expire on December 31, 2020.
That means that you can claim it on your taxes when you file in 2021, but unless Congress extends it, this will be the last year of it.
How Do I Claim The Tuition And Fees Deduction?
To be eligible to claim the tuition and fees deduction you must receive a form 1098-T from an educational institution.
If you do not receive a form 1098-T, you must be able to provide evidence that a student was enrolled in a higher education institution and that they paid for eligible expenses. You may want to keep receipts from textbooks or other purchases if you didn’t buy the items directly through your school.
Can I Claim Combine The Deduction With 529 Savings Plan Distributions?
The IRS doesn’t allow any “double dipping” on this tax credit. If you take the credit, you cannot pay for that credit with savings from the 529 plan. However, you can legally take a 529 distribution and claim the deduction for the same year under certain circumstances.
For example, a student may have paid $13,000 in tuition and expenses in 2020. If she covered that with $9,000 of 529 distributions and $4,000 of income or savings, the full $4,000 deduction can be claimed. If only $2,000 is paid “out of pocket,” then only $2,000 can be claimed as a deduction.
Since 2020 is set to be the last year for the tuition and fees deduction, parents and students may want to cover 2020 expenses with other savings while deferring 529 distributions to the future.
What Other Education Tax Credits Or Deductions Should I Consider?
Before considering the tuition and fees deduction, you may want to look into a few tax credits. Since tax credits lower your tax liability dollar-for-dollar, it's always smart to look for tax credits first. Here are two popular education tax credits.
Related: Tax Deductions vs. Tax Credits
American Opportunity Credit
The American Opportunity Credit is specifically for undergraduate students and their parents. It allows the payer to claim a dollar-for-dollar tax credit for the first $2,000 in eligible higher education expenses (such as tuition, books and fees).
You can also claim a credit for 25% of the next $2,000 in eligible expenses. The total credit is worth up to $2,500 for each undergraduate student. This credit can only be claimed up to four years.
Lifetime Learning Credit
The Lifetime Learning Credit allows taxpayers to claim 20% of eligible expenses (tuition, books and fees) up to $10,000 in expenses. This allows for a credit of up to $2,000. The $2,000 limit is applied no matter how many students are being claimed.
Can I Combine The Tuition And Fees Deduction With Other Education Credits?
You cannot claim the tuition and fees deduction if you or anyone else claims the American Opportunity Credit or the Lifetime Learning Credit for the student in the same tax year.
However, families with multiple students in school may be eligible to claim a credit for one or more students while claiming the deduction for another student.
Figuring out the optimal tax claiming strategy can be a calculation nightmare. Thankfully, any tax filing software will make it easy to maximize the size of your refund based on the information you provide.
Unfortunately, barring an unexpected legislation change, the Tuition and Fees Deduction will be going away at the end of the year. But currently enrolled students can still take advantage of this education tax break to earn an above-the-line deduction of up to $4,000.
Even if you qualify for the deduction, make sure to maximize your tax credits options first. Because the American Opportunity Credit is so similar to the tuition and fees deduction, most undergraduate students and parents will want to select the credit over the deduction.
However, spouses putting themselves through graduate school or parents with multiple children in graduate school may see the benefit of pairing the tuition and fees deduction with the Lifetime Learning Credit. For help maximizing your refund, check out our favorite tax software companies.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.