The National Association of Student Financial Aid Administrators (NASFAA) has just published its 2017 Higher Education Tax Benefit Guide to help families learn about the credits and deductions they can claim on their upcoming tax returns if their children are attending college.
“Many families overlook these benefits each year due to confusion surrounding tax credit options,” said Megan Coval, NASFAA vice president of policy and federal relations in a statement.
“As the cost of obtaining a higher education continues to increase, we encourage parents to and students to take every opportunity to educate themselves about their finances and take advantage of benefits that can help ease the financial burden of paying for college.”
(Related: How American Families Pay for College: 2017)
In addition to explaining available tax benefits, the guide provides links to relevant IRS publications and highlights changes to benefits that were available previously.
Changes to Benefits for the 2017 Tax Year
The tax deduction for tuition and fees, which was due to expire at the end of 2016, was not extended in the new tax cut law, leaving many to believe that it had expired. But the combination of the Bipartisan Budget Act of 2018 that Congress passed in February followed by the 2018 omnibus spending bill that it passed last Friday extended the deduction through the end of 2017. It is an “above the line deduction,” meaning that taxpayers don’t have to itemize to take it.
It’s worth a maximum $4,000 for qualified educational expenses and is available for single taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less and for married taxpayers filing jointly with an MAGI of $160,000 or less.
Taxpayers can also claim a maximum $2,500 deduction for the interest payments on student loans but the MAGI cap for that deduction has been raised slightly for married couples filing jointly.
The cap for them is $165,000 modified adjustable gross income (MAGI), up from $160,000 for the 2016 tax year; for single filers the cap is unchanged at $80,000. Phaseouts for the deduction begins at $135,000 for couples filing jointly and $65,000 for singles.
This deduction is also available for non-itemizers but cannot be used by those who are married and filing separately or by a someone who can be claimed as a dependent on another’s tax return. Also, the deduction can only be used for qualified loans used to fund expenses such as tuition, fees, books, and room and board for students enrolled at least half-time at an accredited institution.
Popular Tax Credits
The NASFAA guide highlights two popular tax credits, which directly reduce the amount of taxes owed, unlike deductions, which reduce the amount of income that is taxed. Early versions of the tax cut bill would have made changes to these tax credits, but the final bill that passed does not.
The American Opportunity Tax Credit provides up to $2,500 credit per student during the first four years of college education and is refundable up to 40% (you can get a $1,000 credit even if you owe no tax). It’s available for single taxpayers with MAGI up to $90,000 and joint filers with MAGI up to $180,000 but begins to phase out at $80,000 and $160,000, respectively, to offset educational expenses for students enrolled at least half-time at an accredited institution.
The credit is not available if the student was convicted of a felony for possessing or distributing a controlled substance on or before Dec. 31, 2017, and starting with the 2017 tax year, anyone who claims the credit who isn’t eligible can be banned from claiming it up to another 10 years.
(Related:15 Lowest Cost 529 College Savings Plans)
Also starting this year, taxpayers must have a taxpayer identification number by the due date of their 2017 tax return including extensions in order to claim the credit. For U.S. citizens the TIN is their Social Security number; others can file for a TIN with the IRS.
The Lifetime Learning Tax Credit provides up to $2,000 credit per tax return, not per student, is nonrefundable and can be used to offset educational costs even if the student is not pursuing a degree or certificate.
Most important, taxpayers can claim only the Lifetime Learning Tax Credit or the American Opportunity Tax Credit, not both.
The Lifetime Learning credit is capped at $132,000 for married couples filing a joint return and $66,000 for single filers. Students who have felony drug convictions can qualify.
For the 2017 tax year, taxpayers do not have to file a 1098-T statement from an educational institution documenting the amount of qualified educational expenses paid in order to qualify for the American Opportunity or Lifetime Learning tax credit.