Picnic’s Tax Blog

Don’t Forget These Deductible Educational Expenses

Don’t Forget These Deductible Educational Expenses
Ryan McInnis
Education desk

Higher education is becoming increasingly necessary in today’s world. At the same time, however, it’s becoming less and less likely that your education will pay for itself once you land a great job after graduation. To help offset exorbitant tuition rates and fees, the IRS offers several tax deductions to help with qualified education expenses.

Higher education is becoming increasingly necessary in today’s world. At the same time, however, it’s becoming less and less likely that your education will pay for itself once you land a great job after graduation. To help offset exorbitant tuition rates and fees, the IRS offers several tax deductions to help with qualified education expenses.

Are Education Expenses Tax Deductible?

Yes. And no. Qualified education expenses are deductible, but not every education-related expense counts. Before we examine which education expenses you can deduct on your tax return, lets talk about a few that you can’t.

One big expense that you can’t deduct is the cost of living. Even if you choose to live in campus housing, you can’t deduct the cost of room, board, or other living expenses. This makes sense when you think about it. After all, you need to keep a roof over your head and food in your belly whether you go to school or not.

The same is true of healthcare, so you can’t deduct student health fees, medical expenses, or health insurance costs as educational expenses. Other insurance premium deductions are also off the table, including car insurance and renter’s insurance — even if you stay in an off-campus apartment. You can’t deduct any transportation costs either.

So far, all of the expenses you can’t deduct are arguably more related to life in general than your education specifically. There are, however, a few more forbidden deductions that are more closely school-related. One is the cost of non-credit courses unless they’re necessary for your degree program.

Let’s pretend that you’re currently enrolled in two non-credit courses. One is a short library sciences course that explains the research process and how to use the campus library effectively. You won’t get credit for the course, but it is required that every student at your school take it. In this case, you can deduct the tuition and fees you pay for the course.

Now let’s assume your second non-credit course is remedial math. You took the course voluntarily to brush up on your math skills before taking a required algebra class. You aren’t required to take remedial math and you won’t get credit for it. In this case, you can’t deduct expenses or tuition associated with the course.

The IRS also disallows deductions for sports, clubs, and other extra-curricular activities. Again, the IRS makes exceptions if the activity is necessary for your degree. If, for example, you want to be a physical education teacher, the school may require you to play a sport as part of your degree program. If so, then you can deduct the related expenses.

What are Qualified Education Expenses?

Now that you’ve seen the lengthy list of disallowed deductions, you’re probably wondering if there are any deductions left! The reason we talk at such great length about disallowed deductions is because students frequently take them by mistake. As a general rule, however, any education expenses not mentioned above are deductible.

Qualified education expenses that you can deduct include tuition, mandatory fees, lab fees, student activity fees, the cost of books, and other expenses that your school requires for enrollment. Typically these are fees you pay to the school directly.

The American Opportunity Credit (AOC), which we’ll talk more about soon, expands the expense you can deduct. Under the AOC, you can deduct the cost of books and equipment you need for school even if you purchased them from a third party rather than your school itself.

At tax time, remember to view education a bit more broadly. Education deductions aren’t just for college students. You can also deduct the cost of trade school or training you must take for your career. CPAs, for example, are often required to attend periodic educational and training programs to keep their CPA designation. Because they’re directly related to and necessary for the job, you can deduct the cost of these educational programs even though you may not be a typical college student. If you’re self-employed, report these expenses on your Schedule C.

American Opportunity Credit

Worth up to $2,500 per student, the AOC allows you to include the cost of books, classroom supplies, and equipment you need for school as well as tuition and fees. Students within their first four years of higher education are eligible for the AOC, so long as your adjusted gross income (AGI) is less than $80,000 ($160,000 if married filing jointly).

The AOC is a refundable credit, so it’s one you don’t want to overlook. Being refundable means you can get the credit even if it exceeds the amount of tax you owe. If you owe $1,000 but qualify for $2,500 AOC, you will get a tax refund of the remaining $1,500 credit.

To claim your AOC, you must file a Schedule 3 and IRS Form 8863 with your tax return.

The Lifetime Learning Credit

The Lifetime Learning Credit (LLC) encourages lifelong earning by allowing you to deduct educational expenses for undergraduate and graduate courses as well as classes you take to improve your skills in your current career or to acquire new skills.

You can claim the LLC as many times as you like, helping to ensure that going back to school is always an option. The LLC allows you to deduct 20 percent of your first $10,000 in educational expenses for the year, making it worth a maximum of $2,000 per year.

Unlike the AOC, the LLC isn’t refundable. If you qualify for a $2,000 LLC and owe $1,000 in taxes, the LLC will cover your tax debt but that’s it. You won’t get the extra $1,000 as a refund. It simply vanishes into the ether.

The LLC is subject to the same income limits as the AOC, however. To be eligible for the full credit, your AGI must not exceed $80,000 ($160,00 if you’re married). Claiming the LLC also requires IRS Form 8863.

Tuition and Fees Deduction

It’s generally best to take the AOC or LLC when you can. If you can’t for some reason, the tuition and fees deduction is the next best thing. At the end of the year, your educational institution will send you a Form 1098-T. This form will tell you exactly how much you paid in tuition and fees.

This deduction allows you to claim up to $4,000 for your educational expenses, including amounts paid for books and other required materials. If your income is less than $65,000 ($130,000 if married). If your income exceeds this amount you can still take the deduction, but it is reduced to $2,000 for those with incomes between $65,000 and $80,000.

Unfortunately, the tuition and fees deduction is set to expire on December 31, 2020. You may deduct it on your 2020 tax return for the last time. Unless the tax law changes, this deduction won’t be an option in 2021 or beyond. To claim it in 2020, simply list it in the appropriate place on your Form 1040.

Student Loan Interest Deduction

Fortunately, the related student loan interest deduction hasn’t gone anywhere. Students with an AGI of less than $70,000 ($140,000 if married) can claim the maximum credit of $2,500. As your income increases, the deduction begins to phase out.

Note that this deduction is $2,500 is per return, not per student. Even if you and your spouse both paid student loan interest, the maximum amount of the deduction remains $2,500. You’ll need to file a Schedule 1 with your return to claim this deduction. Your loan holder will send you a Form 1098-E at the end of the year detailing the amount of interest you paid.

When claiming an educational tax credit, you must choose between the AOC, the LLC, or the tuition and fees deduction. You may only take one per student. The pros at Picnic Tax are happy to talk to you and help you decide which of these options is the best one for you this year. Reach out to us today and get help reducing the cost of your education.