Terry Savage: Tuition tax deductions and credits
—Student loan interest deduction: The federal government allows up to $2,500 of your federal and/or private student loan interest charges to be deducted from your taxable income for tax year 2020 if Modified Adjusted Gross Income is below $70,000 as a single filer. The deduction phases out for income between $70,000 and $85,000. To qualify, the loan must be in the tax filer’s name.
—Tuition and fees deduction: 2020 is the last federal tax year the tuition and fees deduction can be claimed. It reduces taxable income by up to $4,000 on single-filer returns with MAGI below $80,000 as a single filer. Next year, this deduction will be replaced with higher income limits for the Lifetime Learning Credit tax credit.
—Lifetime learning credit: A $2,000 credit against taxes per year for an unlimited number of years. MAGI must be below $69,000 as a single filer and the credit can be claimed by the person paying for higher education expenses.
—American opportunity tax credit: The credit gives back up to $2,500 per year for the first four years of higher education. The student must be attending a qualified college, pursuing a degree, with at least half-time status.
Note: You can take only one of these tax credits per student per year, and MAGI cannot exceed $90,000 as a single filer.
And, finally, if you’re fortunate enough to get a scholarship or grant, you should know that if you spend the money on tuition and fees, books, supplies and equipment, those dollars are tax-free. But if you spend scholarship money on room and board, it can be taxed.
Student loans are what I call the “roach motel” of personal finance — easy to get into and almost impossible to get out of! And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
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