ABCs of Education-Related Tax Breaks

On a personal level, there are numerous education-related federal tax deductions and credits to consider. But the key to claiming them is detailed recordkeeping. So, save those receipts!

Educator Expenses

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of any unreimbursed expenses that are otherwise deductible as a trade or business expense. If you’re married filing jointly and both spouses are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.

This deduction was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Starting in 2016, the deduction will be indexed for inflation and include professional development expenses.

Without this deduction, unreimbursed professional development expenses would be deductible only as unreimbursed-employee-business-expense miscellaneous itemized deductions subject to the 2%-of-AGI floor. Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

Higher Education Tuition Tax Breaks

College can be particularly expensive for families. Fortunately, Uncle Sam offers tax breaks to help ease the financial burden. If you pay higher education costs for yourself or an immediate family member, including a child, you may qualify for either one of two education tax credits (but you can’t claim both): The maximum American Opportunity Tax Credit (AOTC) is $2,500 per student while the maximum Lifetime Learning credit is $2,000 per taxpayer. Both higher education credits are phased out for upper-income taxpayers based on modified adjusted gross income (MAGI).

In addition, the deduction for qualified tuition and fee expenses was extended through 2016 by the PATH Act. Depending on your MAGI, the deduction on your 2016 return is either $4,000 or $2,000 before it’s completely phased out. (Note that you can’t deduct tuition expenses if you claim one of the higher education credits.)

The IRS recently issued proposed regulations containing compliance requirements for people who want to take the AOTC, the Lifetime Learning credit or the deduction for qualified tuition and fee expenses.

Under the Trade Preferences Extension Act of 2015, students must generally receive a Form 1098-T, “Tuition Statement,” to claim these tax breaks for tax years beginning after June 29, 2015. The proposed regs note that the amount reported on the Form 1098-T may not reflect the total amount of qualified tuition and related expenses that the taxpayer has paid during the tax year, because certain expenses aren’t required to be reported on the Form 1098-T.

For example, expenses for course materials paid to a vendor other than an eligible educational institution would be eligible for the AOTC. However, because these expenses aren’t paid to an eligible educational institution, there’s no requirement to report the amounts on a Form 1098-T.

Under the PATH Act, taxpayers claiming the AOTC must also include on their return the employer identification number of the educational institution to which qualifying tuition and related expenses are paid and the tax identification number (TIN) of the student and (if different) the taxpayer. The TINs generally must have been issued on or before the due date of the return on which the credit is claimed. The proposed regs clarify these requirements, which were effective for tax returns filed after December 18, 2015.

Got Questions?

Parents often wonder if money they spend on education expenses can be deducted or will earn a tax credit. These are just a couple of ideas. Contact YHB for more details about education-related tax breaks at the federal and state levels.

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