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Major Changes to Higher Education Tax Credits

February 18, 2021

Individual taxpayers…you’ll want to read up on how the Consolidated Appropriations Act of 2021 (CAA) changed higher education tax credits including the tuition and fees deduction. Read on.

The Consolidated Appropriations Act of 2021 introduces some major changes to higher education tax credits…are you up to date on what has changed? The CCA was signed into law December 27, 2020 and contained several provisions which impacted the tax benefits relating to an individual’s incurrence of higher education expenses. Prior to enactment there were primarily three options available, each having a different set of restrictions and benefits – The American Opportunity Credit; Lifetime Learning Credit; and The Tuition and Fees Deduction. Let’s see how the CAA changed this.

Refresher on higher ed tax credits

The American Opportunity Tax Credit (AOTC) provides a partially refundable credit of up to $2,500 for certain qualifying expenses paid in pursuit of a degree during the first four years of higher education. The credit applies to 100% of the expenses up to $2,000 and then on 25% of the following $2,000 of expenses.

The Lifetime Learning Credit (LLC) is a nonrefundable credit of up to $2,000 and contains an expanded definition as to what constitutes a qualifying education expense - including obtaining a degree, credential or to improve one’s job skills. In addition, there is no limit on the number of years it can be claimed. The credit is 20% of the expenses paid up to $10,000.

The Tuition and Fees Deduction provides an above the line deduction of up to $4,000 for those with income of $130,000 or less when married filing jointly or $65,000 for single filers. The deduction is limited to $2,000 for those with income above those thresholds but are at or below $160,000 and $80,000, respectively.

What did the CAA change?

Prior to enactment of the CAA, the AOTC was available to taxpayers with income less than $180,000 if married filing jointly or $90,000 for single filers. Whereas the LLC was only available for those earning less than $138,000 and $69,000, respectively.

For tax years after 2020, the CAA eliminated the Tuition and Fees Deduction and increased the income limitation on the LLC to align with AOTC. This not only created simplification but will also generally result in a greater benefit being derived by taxpayers.

Additional changes occurred for employer provided education assistance.

Employers historically have been able to deduct certain education expenses they pay for employees. While each employee can exclude up to $5,250 of this benefit received from gross income under Section 127. The CARES Act expanded this benefit to encompass an employee’s student loan payments made by their employer between March 27, 2020 and December 31, 2020. The CAA extended this provision for five years and is now set to expire December 31, 2025.

Claiming education credits can significantly increase your tax savings, see if you can benefit. Need help analyzing your individual situation? Contact us.

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