The Tax Cuts and Jobs Act (TCJA) included many changes that affect individual taxpayers. But not so much for education-related tax breaks. The new law expanded one break, eliminated another, and left the rest untouched. Here’s the first installment of our two-part story on education breaks after the TCJA. The breaks covered here were not changed by the TCJA.
American Opportunity Credit covers up to $2,500 of undergraduate college expenses
The American Opportunity credit still equals 100% of the first $2,000 of qualified post-secondary education expenses plus 25% of the next $2,000 (assuming the phase-out rule explained later doesn’t affect you). So the maximum annual credit is $2,500. The credit is only allowed for expenses for a year during which the student carries — for at least one academic period beginning in that year — at least half of a full-time course load in a program that would ultimately result in a degree or recognized credential. So while you have to be a fairly serious student to be eligible for the credit, you don’t have to go to school full-time or actually intend to complete a degree or credential program.
Eligibility rules and qualified expenses
You’re ineligible for the American Opportunity credit if you’ve already completed four years’ worth of undergraduate college work as of the beginning of the tax year in question. If that’s your situation, move on to the Lifetime Learning credit explained below.
On a more favorable note, you can claim the credit for your own expenses and additional credits for your spouse and dependent children if they also have qualified expenses.
The student must attend an eligible institution. Fortunately, virtually all accredited public, nonprofit, and for-profit postsecondary schools meet this definition, and some vocational schools do too. The two main criteria are that the school must offer programs that lead to an A.A., B.S., B.A., or some other recognized undergraduate credential; and the school must qualify to participate in federal student aid programs.
Qualified expenses include tuition, mandatory enrollment fees, and course materials including books. However, optional fees for things like student activities, athletics, and health insurance don’t count. Neither do room and board costs.
Income phase-out rule
The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high.
• The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000.
• The range for married joint filers is between $160,000 and $180,000.
MAGI means “regular AGI” from the last line on page 1 of your Form 1040 increased by certain tax-exempt income from outside the U.S. that you are unlikely to have.
Lifetime learning credit covers up to $2,000 for grad school and other training
The Lifetime Learning credit equals 20% of up to $10,000...