Education Tax Breaks Available for Students

MAGI limits are $59,000-$69,000 for single taxpayers for 2020 and $118,000-$138,000 for joint returns for 2020.

MAGI limits for 2021 are $80,000-$90,000 for single filers, $160,000-$180,000 for joint filers.

Can’t be taken if married filing separately.

Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Student must be enrolled in program leading to degree or other recognized credential, studying at least half-time.

Can’t be used for graduate or professional level programs or by anyone with a felony conviction for a state or federal drug offense.

Cannot be claimed by the student if he or she has unearned income subject to the “kiddie tax.”

Can’t be taken if married filing separately.

Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Can’t be taken if Lifetime Learning Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell Educational Savings Account (Coverdell ESA) or qualified tuition program (529 plan), but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per student.

Can’t be taken if American Opportunity Tax Credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or 529 plan, but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per return.

For 2021 and 2022, MAGI phase-out is $70,000 - $85,000 for all filing categories except married filing jointly; for 2021, MAGI phase-out is $140,000 - $170,000 for joint filers; for 2022, MAGI phase-out is $145,000-$175,000 for joint filers.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.

Deduction may be taken even for voluntary payment of interest.

Must have been in degree program and at least half-time student to take the deduction.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.

Three general types of 529 plans exist:

• Pre-paid tuition plans — generally guaranteeing future tuition coverage at a state university
• State 529 college savings plans — generally sponsored by a state, allowing you to use saving plan proceeds to attend a state or private university
• Independent 529 plans — sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state-sponsored programs are partially or fully deductible on some state tax returns.

$2,000 maximum annual contribution per year per beneficiary.

As with IRAs, contribution can be made up to the tax filing deadline, which is April 18, 2022 for most states.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $500,000 in some states such as California, New York, and Pennsylvania. In the case of many 529s, accounts can be opened with as little as $10 or $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

Can be used to pay for tuition, fees, books, supplies and equipment for both K-12 and post-secondary.

For K-12, can also pay for uniforms, transportation, supplementary items, and services such as extended day programs, room and board, and purchase of computer technology and Internet access (but cannot be used for sports, games, or hobby software unless it is predominantly educational).

For post-secondary education, can cover expenses for room and board if the student is enrolled at least half-time and the amount meets certain guidelines. Can also be used to fund a qualified tuition program.

Distributions can be used for accredited post-secondary books, supplies, equipment, room and board, transportation, and other necessary expenses in addition to tuition, and student activity fees and course-related fees paid directly to the accredited post-secondary educational institution.

They also include amounts paid for computers and peripheral equipment, software, and internet access and related services if the items are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Qualified expenses also include the reasonable cost of room and board if the beneficiary is enrolled at least half-time.

Qualifying expenses include registered apprenticeship programs and qualified education loan repayments (up to $10,000 for each).

Up to $10,000 per year can be used for qualified elementary and secondary education tuition.

Amounts may be rolled into ABLE accounts for the same beneficiary.

Contribution phase-out ranges

The phase–out ranges from modified adjusted gross income (MAGI) of $95,000–$110,000 for single filers, $190,000–$220,000 for joint filers; no phase out for corporation or other entities, including tax–exempt organizations. These numbers are not subject to inflation adjustment.

Beneficiary must be younger than 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty-free withdrawals can be made in connection with service academy appointments, i.e., Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be made in cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

Check tax treatment of contributions for state income tax purposes.

Limited ability to change investment options.

Possible 10% penalty if distributions are not used for qualified expenses.

Beneficiary can be changed if new beneficiary is a member of the same family.

Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.