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Tax Benefits for Education Expenses in 2019

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Here’s something everyone already knows: college isn’t cheap! With approximately 19.9 million students expected to attend American colleges and universities in the fall semester of 2019[i], parents must be thinking about how tuition costs are going to be met. While the largest source of funding comes from loans via financial aid, tax breaks also play a significant role in helping make education more affordable.

There are two primary tax breaks for education expenses: the American Opportunity Tax Credit and the Lifetime Learning Credit. The Tuition and Fees Deduction expired as a result of the Tax Cuts and Jobs Act signed in 2017.

The American Opportunity Tax Credit (AOTC)

The AOTC, formerly known as the Hope Credit, currently provides up to $2,500 of direct tax credits per student to help alleviate the cost of higher education. The first $2,000 of qualified higher education expenses are eligible for 100% reimbursement in credits, and the next $2,000 can generate an additional 25%, for a total of $2,500 in credits for the first $4,000 of education expenses.

The credit is only available for the first four years of a student’s college education, and the student needs to carry at least half of a full course load. In addition, the student needs to be enrolled in a program that leads to a degree or credential.

Income limits apply for those attempting to claim the credit. For 2019, taxpayers filing jointly are phased out when adjusted income is between $160,000 and $180,000. Single taxpayers are phased out of claiming the credit when adjusted income is between $80,000 and $90,000. Taxpayers who don’t pay federal income tax as a result of very low earnings are eligible to receive up to 40% of the credit as a refundable tax credit.

The Lifetime Learning Credit

The Lifetime Learning Credit is worth up to $2,000 per year, crediting 20% of the first $10,000 of qualified higher education expenses. Unlike the AOTC, the Lifetime Learning Credit isn’t restricted by number of years and the student does not need to be pursuing a degree program. Also, there is no full-time course load requirement. The credit can be used even if only one class is being taken.

There are income limitations in place which restrict access to the credit for higher income earners. In 2019, married taxpayers filing jointly are phased out starting at $116,000 and credits are eliminated once adjusted income reaches $136,000. The range for single taxpayers is $58,000-$68,000. Note, the credit is limited to $2,000 per taxpayer per calendar year, while the AOTC is limited on a per student basis.

Putting It All Together

Unfortunately, the tax credits can’t be used for the same expenses in the same year, so you’ll have to evaluate your situation to make the best choice. As a general rule of thumb, the AOTC will give the highest benefit to most taxpayers. As with everything tax and finance related, there are always exceptions, so consult with your Certified Financial Planner Practitioner™ and tax professional to ensure you’re making the best choices.

Tax Year 2019 Education Credits Comparison – IRS chart[ii]

Maximum credit or benefitUp to $2,500 credit per eligible studentUp to $2,000 credit per return
Refundable or nonrefundable40% of creditNot refundable
Limit on modified adj gross income for married filing jointly $180,000$134,000

Limit on modified adj gross income for single, head of household, or qualifying widow(er)

Can you file married filing separately? No
Dependent status Cannot claim credit if you are claimed as a dependent on someone else’s return
Must you or your spouse be a U.S. Citizen or Resident Alien?Yes, unless nonresident alien is treated as resident alien for tax purposes (see Publication 519 for information on nonresident alien status)
Number of years of post-secondary education availableOnly if student hasn’t completed 4 years of post secondary education before 2018All years of post secondary education and for courses to acquire or improve job skills
Number of tax years credit available4 tax years per eligible student including any years former Hope credit claimedUnlimited
Type of program requiredStudent must be pursuing a degree or other recognized education credentialStudent does not need to be pursuing a degree or other recognized education credential
Number of coursesStudent must be enrolled at least half time for at least one academic period beginning in 2018Available for one or more courses
Felony drug convictionNo felony drug convictions as of the end of 2018Does not apply
Qualified expensesTuition, required enrollment fees and course materials needed for course of studyTuition and fees required for enrollment or attendance
Whom can you claim the benefit for?·         You

·         Your spouse

·         Student you claim as a dependent on your return

·         You

·         Your spouse

·         Student you claim as a dependent on your return

Who must pay the qualified expenses?·         You or your spouse

·         Student

·         Third partyˆ

·         You or your spouse

·         Student

·         Third partyˆ

[i] https://nces.ed.gov/fastfacts/display.asp?id=372

[ii] https://www.eitc.irs.gov/other-refundable-credits-toolkit/compare-education-credits/compare-education-credits




wisdom wealth strategies

Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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