Tuition costs are rising, but tax benefits may be available

EY TaxChat™ can help identify which education credits, deductions and savings plans may benefit you when preparing your individual returns.

In brief

• Determining your eligibility of the two major education credits: the American Opportunity Tax Credit or Lifetime Learning Credit.
• You may deduct up to $2,500 of the interest paid on your student loan during the year.
• Qualified tuition plans such as 529 Plans are a tax efficient approach to saving for future education for your dependents.

As a common and far-reaching topic, the cost of education impacts almost all individuals, each with a unique set of circumstances and scenarios. From a tax perspective, even subtle nuances can make a major difference in determining which education credits, deductions and savings plans are most beneficial — EY TaxChat™ can help.

American Opportunity Tax Credit (AOTC)

First, a disclaimer — if you or your children are enrolled in graduate school, then unfortunately this credit is not for you. However, for those enrolled in an undergraduate program, you may be eligible for a federal tax credit up to $2,500 per eligible student for qualified education expenses paid for the first four years of higher education. Further, this credit is partially refundable, which means if your federal tax liability is reduced to zero as a result of claiming the AOTC, you may be able to claim a refund of the remaining amount, up to $1,000 for the year.

Keep in mind, many federal income tax credits, including the AOTC are “phased out” once your income reaches a certain level. In the case of the AOTC, the credit is not available or is completely “phased out” once your modified adjusted gross income exceeds $90,000 for single taxpayers, and at $180,000 for married taxpayers who file a joint return in 2022 (refer to the IRS guidance at www.irs.gov/credits-deductions/individuals/aotc for more information).

Lifetime Learning Credit (LLC)

For individuals unable to claim the AOTC (including graduate students), the Lifetime Learning Credit (LLC) is another federal income tax credit to consider as an alternative. It’s less restrictive, as it’s available for those enrolled in undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. Unlike the AOTC, the Lifetime Learning Credit has no limit on the number of years you can claim the credit. If you or your dependents qualify, you may be able to claim up to $2,000 for this federal income tax credit.

The LLC is not refundable, meaning it can reduce your tax liability up to zero, but any remaining amount of the credit won’t result in a refund. Just like the AOTC, the LLC is “phased out” once your modified adjusted gross income exceeds $90,000 for single taxpayers, and at $180,000 for married taxpayers who file a joint return in 2021 (refer to the IRS guidance at www.irs.gov/credits-deductions/individuals/aotc for more information).

Student loan interest deduction

Millions of Americans rely on student loans to fund their education. For those paying interest on their student loans, you may be able to deduct up to $2,500 of the interest paid during the year. Unlike the previous tax credits described, the deduction does not directly reduce your tax, but instead reduces the amount of income subject to tax. The deduction is “phased out” once your modified adjusted gross income exceeds $85,000 for single taxpayers and at $175,000 for married taxpayers who file a joint return in 2022.

Qualified tuition plans – 529 Plans

Tax benefits for education are not limited to credits and deductions. 529 Plans have become a popular option to save for future education costs in a tax-efficient manner. Namely, investment income generated within the account is not subject to tax, allowing for tax-free growth. When the account funds are ready to be used for qualified education expenses (such as tuition, fees, books, supplies, equipment and room and board), the distributions to pay for these expenses are not taxable if paid to an eligible educational institution (generally a college or university and recently expanded to include elementary, private or religious schools). Further, some states offer tax benefits for contributions made to a Qualified Tuition Plan or 529 Plan.

About EY TaxChat™

EY TaxChat is an on-demand mobile service that connects you with a licensed tax professional who will prepare your taxes and file them for you. Click here to learn more and register for EY TaxChat at any time, from anywhere, or by downloading the app from the Apple App Store or GooglePlay Store. 

This information is provided solely for educational purposes; it does not take into account any specific individual or entity’s facts and circumstances. It is not intended, and should not be relied upon, as tax, accounting or legal advice. Ernst & Young LLP expressly disclaims any liability in connection with the use of this presentation or its contents by any third party. Neither EY nor any member firm thereof shall bear any responsibility whatsoever for the content, accuracy or security of any third-party websites referenced.