Although changes to tax law in 2018 eliminated some popular tax deductions for education expenses, there are still deductions and credits available for students and recent graduates in 2020.
Big Changes to Tax Law
As of the 2017 tax year, which was filed in 2018, you can no longer use the tuition and fees deduction. Income adjustments in the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) reduce and phase out the deduction within specific income brackets. You will no longer use Forms 1040A or 1040-EZ for education filings.
However, as a current student or recent graduate, you can still claim some education expenses as tax deductions. The federal government uses tax adjustments like deductions and credits to incentivize United States residents to get higher degrees. Some of these taxes reduce how much students pay if they take out loans, while others incentivize students to continue returning to school and improve their job skills.
Tax Deductions for Education Expenses in 2020
These are the best options for deducting your education expenses:
- Student loan interest deduction: This is the most common tax deduction for educational expenses since the 2018 tax law changes. While some loans require interest to be paid immediately after disbursal, others do not require payments until graduation. Either way, once you begin paying interest on your student loans, you can claim it as a tax deduction.
After paying $600 in interest on student loans, your loan servicer will send you tax information. You can claim up to $2,500 under the student loan interest deduction, which reduces how much you pay in taxes.
To qualify for this deduction, your loans must:
- Have paid solely for qualified educational expenses like tuition or books.
- Covered the cost of attending school at least half-time in an accredited degree program.
- Not be a personal loan from a friend or family member, even if it accrues interest.
With the tax law changes in 2018, the modified adjusted gross income (MAGI) requirements changed.
Single tax filers:
- Must make $65,000 or less to qualify for the full deduction.
- Must make between $65,000 and $80,000 for a partial deduction.
- Cannot qualify for the deduction if their income exceeds $80,000.
- Cannot be claimed as a dependent on someone else’s taxes.
Married tax filers:
- Must be filing jointly, not married filing separately.
- Must make $135,000 or less for the full deduction.
- Must make $135,000 to $160,000 for a partial deduction.
- Cannot qualify if you and your spouse’s combined income exceeds $160,000.
Most people repaying their student loans receive a monthly bill for a portion of the principal, interest, and associated fees. The student loan interest deduction does not cover any cost related to the principal of your loan. However, you can count some additional fees and adjustments as interest rather than the principal of your loan. These include:
- Some loan origination fees.
- Capitalized interest added to your principal during a deferment or forbearance.
- Interest on revolving lines of credit (like credit cards) that you use to make student loan interest payments.
- Interest on refinanced or consolidated loans.
- Business deduction for work-related education: Sometimes, your employer may ask you to attend supplementary training, like night classes or online courses, to improve your skills. If the company does not pay for these expenses, but you are still required to pursue this training, you can claim it on your taxes.
Additionally, self-employed people or those who work for small companies can take the cost of training and education off their taxes, thanks to this education deduction.
Qualifying work-related education includes:
- Education required by your current employer to keep your current job, present salary, or status.
- Education needed to preserve or improve specific skills for your present work, like maintaining certain qualifications.
- Education required by law.
Education expenses that do not qualify include:
- Education needed to meet your minimum job requirements, like a bachelor’s degree.
- Education that trains you for a new form of employment.
Artists and fee-based state or local government officials can deduct expenses from education that qualifies as work-related, which reduces how much they must pay in self-employment tax each year. People who are disabled can itemize these education expenses and include any impairment-related education or training as deductible education expenses.
You may also qualify for tax credits for your education. While you cannot claim multiple education tax credits, you can claim deductions and credits at the same time. For self-employed people seeking further job training that is not specifically a higher degree, using both deductions and credits can lower self-employment tax.
Deductible expenses include:
- Tuition, books, supplies, lab fees, and items directly related to your coursework.
- Some travel and transportation costs, such as costs related to driving to campus.
- Educational expenses like the cost of research if you need to purchase any published work.
You cannot deduct personal or capital expenses, like vacation time or annual leave taken to attend classes.
- Employer assistance with education: If you receive help getting additional job training or related education through an employee assistance program (EAP), you can deduct up to $5,250 of those benefits from your taxes each year.
If your employer pays more than that, this is considered taxable income on your end. However, your employer cannot include those benefits in your wages, tips, or other compensation, as shown on the W-2 you receive during tax time. You cannot include these as a financial benefit for yourself on your income tax return.
To determine if your EAP qualifies for this form of tax deduction, talk with your supervisor or the financial office at your company.
Eliminated Tax Deductions That Might Still Help You
A tax credit claimed by many students while they were still in school was the tuition and fees deduction. This education expenses tax deduction expired in 2017 and was not renewed as part of the tax overhaul in 2018.
If you are still adjusting tax filings from 2017 or prior years, you can still claim this credit if you have qualifying expenses. Some financial advisors recommend that you keep information on qualifying expenses for 2018 and later, in case Congress renews the tuition and fees deduction and allows qualifying individuals to claim this credit retroactively.
Tax Credits Can Also Help You With Education Expenses
The changes to tax law have led current students to focus on two tax credits rather than tax deductions: the AOTC, which benefits current undergraduate students in the first four years of their education, and the LLC, which benefits undergraduates taking longer than four years to complete their degree, along with professional or trade school students, certification program students, and graduate students.
While these tax credits have several similarities, you cannot claim both credits at the same time. However, you could claim one of these tax credits, along with the student loan tax deduction or a professional education tax deduction. For example, if you are a new graduate student who is still paying undergraduate loans, you qualify for the LLC along with the student loan tax deduction.
Although some tax deductions for education expenses have been removed, there are still three deductions that benefit graduated professionals and those who seek to continue their education through their employer.