Tax Changes for Students and Teachers

As the school year begins, students are considering what classes they need to take and how much the classes will cost. Whether it’s community college, a trade school, a four-year university or an advanced degree, higher education is expensive. The good news is tax deductions and credits can help offset these costs.

These deductions and credits reduce the amount of tax someone owes. If the credit reduces tax to less than zero, the taxpayer could even receive a refund.

Taxpayers who pay for higher education in 2021 can see these tax savings when they file their tax return next year. If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.

In addition, teachers are offered a deduction for out-of-pocket expenses that they incur for books and supplies they use in the classroom. 

Expenses of Elementary and Secondary School Teachers.

For taxable years beginning in 2021, the amount of the deduction available to an eligible educator for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom remains at $250 per person.  However, Covid 19 related supplies such as masks and sanitizing products have been added to the list of qualified expenses.

The educator expense deduction rules permit eligible educators to deduct up to $250 of qualifying expenses per year ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each).

Eligible educators include any individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

For 2021, eligible educators can now deduct unreimbursed expenses for COVID-19 protective items to stop the spread of COVID-19 in the classroom. COVID-19 protective items include, but are not limited to:

  • face masks;
  • disinfectant for use against COVID-19;
  • hand soap;
  • hand sanitizer;
  • disposable gloves;
  • tape, paint or chalk to guide social distancing;
  • physical barriers (for example, clear plexiglass);
  • air purifiers; and
  • other items recommended by the Centers for Disease Control and Prevention (CDC) to be used for the prevention of the spread of COVID-19.

Tuition and Fees deduction

In the past, students had a choice of taking a tuition and fees deduction or an education credit.  In most cases, the credit resulted in less tax to pay overall. 

Beginning in 2021, there is no more decision to be made because the Consolidated Appropriations Act (CAA) of 2021 repealed the ability to claim the tuition fees and deduction for post-secondary tuition and fees paid during the year.   

Students will no longer be allowed a deduction for eligible tuition and fees, however, they will be allowed a more favorable income phase-out rule for the Lifetime Learning credit (see above).   In effect, the new provisions would trade the old tuition fee deduction for the increased Lifetime Learning Credit limits as well as the increased phase-out thresholds.

REMEMBER: You may still be able to claim your education expenses on Schedule C if they are reasonable and necessary to your business.  This includes our CE courses!!

Education tax credits

There are two education credits available that may reduce a taxpayer’s tax:

  • American opportunity credit
  • Lifetime learning credit

Taxpayers can take education credits for themselves, their spouse, and/or dependents (claimed on the tax return) who were enrolled at or attended an eligible postsecondary educational institution during the tax year.

To claim either of the two education credits, the following basic requirements must be met:

  • The student cannot be claimed as a dependent on someone else’s tax return
  • The student is not filing as Married Filing Separately
  • Their adjusted gross income (AGI) is below the limitations for their filing status
  • They were not non-resident aliens for any part of the tax year, or if they were, they elected to be treated as resident aliens

If the student is a dependent of the taxpayer, the taxpayer must claim the student as a dependent to receive the credit for the student’s qualified expenses. If the taxpayer claims the student as a dependent, all qualified education expenses of the student are treated as being paid by the taxpayer.

Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Qualified education expenses include non-academic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of institution that must be paid to the institution as a condition of enrollment or attendance. However, for the American opportunity credit, the definition for “certain related expenses” is different from the lifetime learning credit.

In addition to tuition and fees paid to the eligible institution, the taxpayer may add other expenses that qualify for education credits, such as books or supplies not purchased through the school account.

Expenses that do not qualify as educational expenses include:

  • Room and board, insurance, medical expenses (including student health fees), transportation costs, or other similar personal, living, or family expenses
  • Any course of instruction or other education involving sports, games, or hobbies, unless the course is part of the student’s degree program or , in the case of the lifetime learning credit, helps the student to acquire or improve job skill.

If the qualified expenses are paid with a scholarship, grant or other assistance that is not included in income, taxpayers cannot claim any deduction or credit for expenses paid with the tax-free funds.  

American Opportunity Tax Credit

In addition to satisfying the basic requirements, taxpayers can only take the American opportunity credit for a student if all of the following additional requirements are met:

  • the student is still in the first four years of postsecondary education
  • the American opportunity credit has not been claimed for this student for four years
  • the student was enrolled in a program that leads to a degree, certificate, or other credential
  • the student was taking at least one-half the normal full-time workload for the course of study, for at least one academic period beginning in the current tax year
  • Has the student been convicted of a felony for possessing or distributing a controlled substance as of year end
  • the student has not been convicted of a felony for possessing or distributing a controlled substance as of year end
  • both the taxpayer and student have a taxpayer identification number (TIN) by the due date of the return (including extensions)

If the student does not meet all of the requirements for the American opportunity credit, the taxpayer may be able to take the Lifetime Learning Credit for part or all of the student’s qualified expenses.

The American opportunity credit may be up to $2,500 per eligible student, depending on the amount of eligible expenses and the amount of tax on the return.

The credit is equal to 100% of the first $2,000 in eligible expenses and 25% of the second $2,000 in eligible expenses per student, up to the amount of tax payable with the return.

If the taxpayer, is unable to use the full credit, 40% of the unused non-refundable credit may be claimed as a refundable credit, which means the taxpayer can receive up to $1,000 even if no taxes are owed.

The amount of the American opportunity credit is phased out (gradually reduced) if the individual’s Modified Adjusted Gross Income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if married filing a joint return). An individual can not claim an American opportunity credit if their MAGI is $90,000 or more ($180,000 or more if you file a joint return).

Taxpayers under age 24 cannot claim the refundable portion of the credit if certain conditions are met

Course-related books, supplies, fees, and equipment are included in qualified education expenses even if they are not paid to the institution as a condition of enrollment or attendance

REMEMBER:  A tax practitioner is subject to due diligence requirements for any returns in which an America opportunity credit is claimed.

Lifetime learning credit

The lifetime learning credit is a non-refundable credit amounting up to $2,500 per student.  The lifetime learning credit is also phased out if modified adjusted gross income exceeds certain thresholds. 

Prior to the Consolidated Appropriation Act 0f 2021 (CAA),  the full value of the lifetime learning credit was available to eligible taxpayers with a modified AGI of up to $59,000, or $119,000 for a joint tax return. For AGI in excess of these amounts, the credit starts to phase-out and is not available at all to those earning more than $69,000, or $139,000 for a joint tax return. The maximum value of the lifetime learning credit that could be claimed was $2,000 per return.

The CAA now allows the Lifetime Learning Credit to be up to $2,500 per student each year. The CAA also increases the phase out range to MAGI between $80,001 and $90,000 for unmarried individuals (and $160,001 and $180,000 for married filing joint filers).

To qualify for the lifetime learning credit the taxpayer must meet the requirements described above.  In addition, the expenses must be considered qualified expenses.   The lifetime learning credit is available for an unlimited number of tax years.  It is also available for all years of postsecondary education and for courses to acquire or improve job skills.  Course-related books, supplies, fees, and equipment are included in qualified education expenses only if they must be paid to the institution as a condition of enrollment or attendance.

PTIN Courses International is an IRS-approved CE Provider.

We offer a quality continuing education experience for a reasonable price of $10.00 per credit hour!! Please take a look at the courses we currently have to offer by visiting our “All Courses” page. We are so excited to become a part of your professional journey.

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