Posted by Income Taxes and Bookkeeping LLC

Tax Deductions and Education Credits You Can Claim for the 2020 Tax Year

Tax Deductions and Education Credits You Can Claim for the 2020 Tax Year

If you paid for college in the past year, you could claim the American Opportunity Credit or the Lifelong Learning Credit, or you can deduct tuition and fees. The American Opportunity Credit is usually the most valuable education tax credit if you qualify.

You could claim these education credits and tax deductions even if you paid for your education with a student loan. Parents can also benefit from it, as long as they do not opt for married filing status. Here's what you need to know about each option.


American opportunity credit

How it works

You can reduce your tax bill to $2,500 if you paid that amount in graduation fees last year. American Opportunity Tax Credit allows you to redeem your entire first $2,000 for tuition, books, and equipment, but not for living or transportation costs, plus 25% of the next $2,000 for a total of $2,500.

Who Can Apply?

American Opportunity Credit is for graduate students and their parents. You can claim a tax credit for up to four years. Your parents/guardians will claim the credit if they pay for your education and if you are registered as dependent on their return.

You could get the total education tax credit if your adjusted gross income or MAGI was $ 80,000 or less in 2020 ($160,000 or less if you are filing jointly). If your MAGI was between $80,000 and $90,000 ($160,000 to $180,000 for joint filers), you would get a reduced credit. If you earn more, you will not be able to claim this credit.

Why consider it?

The American opportunity credit reduces the amount of tax payable. For example, if you have to pay $3,000 in taxes and get a total credit of $2,500, you will only have to pay $500 to the IRS.

Is American Opportunity Credit refundable? Yes, it is. You can still receive 40% of the American opportunity tax credit value, up to a maximum of $1,000, even if you did not earn income last year or if you have to pay taxes. For instance, if you are eligible for a refund, this credit may increase the amount you receive up to $1,000. This is why American Opportunity Credit is often the best way to lower tuition fees for students and their families.

Lifetime Learning Credit 

How does it work?

You can claim 20% of the first $10,000 you pay for tuition and fees in 2020, up to a maximum of $2,000. Like the Opportunity Tax Credit, the Lifetime Learning Credit does not consider maintenance or transportation costs to be eligible expenses. But you can claim books or school supplies.

Who can claim it?

The lifetime learning credit is not just for students or their parents. The credit applies to students or academic professionals, graduates and non-graduates, and there is no limit to the number of years you can apply. So it's great for graduate students or anyone taking classes to develop new skills, even if you've already claimed an American tax credit for your taxes in the past. You cannot apply for American Opportunity Credit and Lifelong Learning Credit in the same year.

Why consider it?

You can claim a credit if your MAGI was less than $59,000 ($118,000 if you submitted a joint return) last year. If your MAGI was between $59,000 and $69,000 ($118,000 to $138,000 if you filed together), you might get a reduced credit. You cannot get credit if your MAGI is over $69,000 ($138,000 for married filing jointly).

Is the Lifetime Learning Loan refundable? No. You cannot receive a lifetime learning loan as repayment if you have no income or pay tax.


Tuition and Fees Deduction

How does it work?

You can deduct up to $4,000 from gross income for the money you spent on qualifying education expenses in fiscal 2020. These expenses include tuition, books, materials, and other purchases required by your school. As with education tax credits, personal expenses, such as transportation, accommodation, and food, are not eligible for this deduction.

The tuition deduction initially expired at the end of 2017 but was later extended to December 31, 2020.

Who Can Claim? 

Tuition and tax deduction are available for students and parents who earned less than $65,000 (or $130,000 for married filing jointly) in 2020. Those who made between $65,000 and $80,000 ($160,000 for married filing jointly) may qualify for a deduction of $2,000.

You cannot claim tuition fees and an education tax credit in the same year for the same student. If you qualify for more educational tax incentives, a tax professional like INCOME TAXES & BOOKKEEPING, LLC. can help you determine which one is most valuable.

Why consider it?

The tuition and fees deduction decreases your taxable income by up to $4,000 if you qualify for the maximum deduction. Reducing taxable income may not save as much as receiving a tax credit, but deducting tuition and taxes may benefit taxpayers who do not qualify for the American opportunity credit or lifetime learning credit.


Educational tax forms

In January, your institution will send you Form 1098-T, a statement showing the tuition fees and expenses you paid for during the year. You will use this form to enter the appropriate amounts on your tax return to claim an education credit or tax deduction.

If you or your parents also paid off student loans, you can deduct the student loan interest from your taxable income. If you have paid more than $600 in interest, your administrator will automatically submit Form 1098-E. You can still deduct the interest if you paid less than $600, but you will need to request the form from the servicer.

If your business has provided funding for educational assistance, such as tuition reimbursement or employer-sponsored student loan reimbursement, up to $5,250 may be dismissed from your taxable income. Student loan payments must have been made after 27th March, 2020, to be eligible.



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