Breaking Down Tax Benefits for Higher Education - 04-01-25

With the rising cost of higher education and greater reliance on student loans, taxpayers are looking for every opportunity to ease the financial burden of earning a degree. Fortunately, several higher education tax benefits are available to help offset the high cost of tuition, student loans and other education-related expenses. However, certain eligibility requirements — such as income limits and tax filing status — often trip up taxpayers along the way. Understanding the nuances of these tax benefits for higher education can ensure your clients take full advantage of available tax savings. Listen in to learn more!

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Transcript

Alright. Welcome in, everyone, to another deep dive. Today, we're gonna get into something Yeah. That really, you know, really affects a lot of people, a lot of our clients. For sure.

And that's higher education. Specifically, we're gonna talk about Right. Tax benefits related to higher education. And for all of you Right. CPAs and EAs and tax professionals listening out there Absolutely.

You know this stuff. But hopefully, we can go a little deeper and maybe for sure. Give you some things to think about with your clients. Yeah. Absolutely.

And so for this deep dive, we're going to be using Okay. Breakingdowntaxbenefitsforhighereducation.PDF as our source. Right. Sounds good. And we're really gonna try to simplify this.

Yeah. Because as you know, there's a ton of information So much. So many laws, so many different things going on. Absolutely. But we're gonna distill it down for you.

Yes. And I think one of the best places to start is with Oh, yeah. The student loan interest deduction. The student loan interest deduction. This is a good one, and it's one that a lot of people qualify for.

Yes. And and this is something that a lot of people miss out on. Yes. They do. And this is a great place for CPAs and EAs to really help their clients.

Help their clients save some money. Yes. Because this is an above the line deduction It is. Which is huge. It is huge.

So you don't have to itemize. Exactly. And this is one of the big ones that people don't realize. Yeah. And that's what makes it so great.

It is. So, essentially, what this allows you to do Right. Is deduct the interest that you've paid Exactly. On either a federal or a private student loan. Yes.

And this is for qualified educational expenses. Right? Yes. So we're talking tuition and fees Right. Room and board, books, supplies Transportation.

Transportation, all that good stuff. Now for the maximum deduction here Yes. What is that what can your client deduct? So for 2024 Yep. The maximum deduction is $2,500 per year.

Okay. $2,500. So that can really add up. If you're carrying a lot of student loan debt Right. Especially when now that we're seeing interest rates Yeah.

Go up Right. Right. And these loans are becoming more expensive. And so correct me if I'm wrong. Yeah.

But this is for the taxpayer, their spouse, or their dependent. Correct. So if a parent takes out a loan Yes. To help their child pay for college Absolutely. They can take that deduction.

They can. As long as it's for qualified expenses. Okay. Good. Good point.

Now, obviously, with every good thing, there's usually some kind of Sure. Limitation. Always. And so with the student loan interest deduction, there are some income limitations. There are.

There are. So for 2024, for single filers Okay. What is that? So for single filers, it starts to phase out at $80,000 of Man GI. Okay.

And it's fully phased out at $95,000. Gotcha. And then for joint filers? For joint filers, the phase out begins at a hundred and $65,000. Okay.

And it's fully phased out at a hundred and $95,000. Okay. Gotcha. So it's important to be aware of those limitations. Absolutely.

And that's where you as tax professionals come in. Right. You gotta help your clients navigate this Exactly. So that they can maximize their benefit. Yeah.

They might not know No. That this deduction even exists. Right. And they might not know that they qualify. Exactly.

Or maybe they're just above the limit. And Right. And there might be strategies They could reduce their income Exactly. And then be able to take advantage of it. Exactly.

Okay. Good. Good. Enough. What about married filing separately?

Yes. Married filing separately. Any limitations there? This is a big one. This is where it gets tricky.

Mhmm. So if your clients are filing as married filing separately Yeah. They are not eligible for this deduction Okay. Which is a problem because sometimes, you know, married couples might choose to file separately. Right.

To try to lower their payments on their income driven repayment plans. Gotcha. So so it's a trade off. It's a balancing act. You gotta weigh the pros and cons Sorry.

Of filing separately versus filing jointly. Okay. Good. Good. And that's where you come in Right.

To advise them. Now what kind of documentation do you need for this? So, typically, if your client has paid $600 or more in interest Okay. They're gonna receive a form ten ninety eight e Okay. From their loan servicer.

And this is called the student loan interest statement. Okay. Pretty simple. 1098 E. Yep.

That's the one. Gotcha. Okay. Keep that in mind. Now Yes.

There's this concept of capitalized interest. Oh, yeah. Capitalized interest. You know, our source material mentions that. It does.

I don't know if you wanna talk a little bit about Sure. I can talk about that. What that is and how that might affect the deduction. So capitalized interest basically occurs when you know you have accrued interest on your student loans Okay. But you haven't paid it yet.

Right. So then what happens is it gets added to the principal balance of the loan. So it's kind of like interest on top of interest. Right. And the good news is for tax purposes Okay.

This capitalized interest is still considered interest. Gotcha. And it could be deductible. Okay. Now here's the catch.

Okay. You can only deduct the capitalized interest Okay. In a year in which you made payments on the loan. Okay. So this is important Yeah.

Because let's say you have a client Right. Who consolidated or refinanced their loans k. And now a good portion of their balance Yeah. Is capitalized interest. Okay.

If they haven't made any payments Yeah. They can't deduct that interest yet. Gotcha. Okay. They have to wait until they start making payments.

So that's something that can trip people up. Absolutely. Right. Because maybe they consolidate or refinance, and they have a grace period or something. Exactly.

Or maybe they're in forbearance or deferment Right. And they're not making payments. Gotcha. So in those situations Yeah. They can't deduct that interest yet.

Okay. And this is also a good point for CPAs and EAs For sure. To, you know, really look into with their clients Might be. To make sure that they are maximizing that deduction. That's right.

Alright. So that's the student loan interest deduction. That's a good one. Now let's move on to something else. Okay.

Maybe the American Opportunity Tax Credit. The AOTC. Yeah. AOTC. Everyone loves this one.

Everyone loves the AOTC. Yeah. This is a this is a good one for sure. It is a good one. It can save you a lot of money.

So tell me, what is it? So the AOTC is a tax credit Okay. And it's worth up to $2,500 per year Okay. Per eligible student. Gotcha.

So per student? Per student. Yes. That's great. And what's great about this is that it directly reduces your tax liability Okay.

Dollar for dollar. Wow. So for the first two thousand dollars in qualifying educational expenses Okay. You get a dollar for dollar reduction in your tax liability. Okay.

So for those first two thousand dollars, it's a true credit? It's a true credit. Okay. Good. Good.

And what are those educational expenses that we're talking about here? So we're talking tuition, fees Right. And required course materials. Okay. And then there's also the refundable portion.

Yes. That's the best part. Which is awesome. It is awesome. Because it can really benefit, you know Right.

Lower income families. Absolutely. So up to 40% of the credit is refundable. Okay. Which means you could get up to a thousand dollars back Okay.

Even if you don't owe any taxes. So even if your tax liability is zero Is zero. Exactly. You can get up to a thousand dollars back. That's right.

That's incredible. It is incredible. So what are the eligibility requirements for this? Okay. So for the AOTC, it's for students in their first four years of post secondary education.

Okay. So basically, freshman through senior year of college? Exactly. Undergraduate years. Undergraduate.

Gotcha. And they have to be enrolled at least half time Okay. For at least one academic period Okay. That begins in the tax year. Gotcha.

And they also have to be pursuing a degree or some kind of recognized credential. That's right. They can't just be taking random classes. Right. Okay.

Good. It has to be towards a degree. So there's some structure to it. There is than Barabbas. And then, again, I assume there's some income limitations.

There are. There are. So for 2024, what are those? Okay. So for single filers, the phase out begins at $80,000 of Maggi.

Okay. And it's fully phased out at $90,000. Okay. And then for married filing jointly? For married filing jointly, the phase out begins at a hundred and $60,000.

Okay. And it's fully phased out at a hundred and $80,000. Okay. So those are important to know. And, again I'm not married filing separately.

Not eligible. Not eligible. Okay. Unfortunately. So another Another thing to keep in mind Planning point for our Yeah.

Tax professional listeners. Absolutely. Now what kind of documentation do your clients need to have? So they should be receiving a form ten ninety eight t Okay. From the eligible educational institution.

And this is the tuition statement. Okay. And it reports the amounts paid for qualified tuition and related expenses. Okay. Now does it include things like books and supplies?

So that's a good question. Yeah. And this is where it gets a little tricky. Okay. Even if the books and supplies weren't purchased directly from the institution Okay.

They can still be claimed as qualified expenses. Okay. Okay. So you don't have to buy them from the college bookstore You don't have to. To be able to take the credit.

Correct. Okay. Good good clarification. Yeah. Important distinction.

And there's a no double dipping rule. Yes. The dreaded no double dipping rule. Tell me about it. So how does that work with the AOTC?

So you can't claim both the AOTC Okay. And the lifetime learning credit Okay. Which we'll talk about in a minute Okay. For the same student in the same tax year. Gotcha.

Gotcha. So you have to choose. So you have to choose which one. Which one is gonna give you the bigger benefit? Right.

So you really have to analyze the situation. Absolutely. Look at their income. Right. Look at their expenses.

The specifics of the education they're pursuing. Exactly. Whether or not they qualify for the AOTC. Right. Versus the lifetime learning credit.

That's right. And remember Yeah. The AOTC is partially refundable. Right. So that's a big factor.

Right. So that might be the deciding factor. It often is. Okay. Good.

So let's talk about this lifetime learning credit. Okay. The LLC. Or the LLC. Yeah.

What's that all about? So the LLC is a little different. Okay. It offers a little more flexibility. Okay.

Because unlike the AOTC Right. Which is limited to the first four years of undergrad Right. The LLC is available for all levels of post secondary education. Okay. So that's great.

So that's great. For people who are going to grad school. Grad school, professional degrees. Or just taking courses to improve their job skills. Exactly.

Like continuing education. That's great. So it's much broader It is much broader. Than the American Opportunity Tax Credit. It Now what's the maximum credit for that one?

So the maximum credit for the LLC is $2,000. Okay. But it's per tax return Okay. Not per student. Gotcha.

And so That's a key difference. That is a key difference. From the AOTC. And then are the income limits the same? They are the same.

Yes. Okay. So just to recap those. Okay. For single filers It starts to phase out over $80,000 Okay.

And is fully phased out at $90,000. Okay. And then for married filing jointly? It starts to phase out over a hundred and $60,000. Okay.

And it's fully phased out at a hundred and $80,000. Okay. Good. Good. And then married filing separately.

Not eligible. Not eligible. Okay. No LLC for you. So keep that in mind, everyone.

Yes. Very important. And then documentation. What do you need for the LLC? So similar to the AOTC Okay.

You're gonna need that form ten ninety eight t. Okay. So pretty standard Pretty standard. For all of these education credits. Yes.

That's the key document. Good. Good. Good. Good.

You're gonna wanna have that. And then just to reiterate that no double dipping rule? Yes. Always reiterate that. So you can't claim both the AOTC Okay.

And the LLC for the same student in the same year. Correct. Do you have to pick one? You have to pick one. So you need to do your due diligence.

Right. And really advise your clients on the big adoption. Absolutely. Now one big difference Yeah. Between the AOTC and the LLC Yes.

This is a big one. Is the refundability? Yes. Refundability. So tell me about that.

So the AOTC is partially refundable. Right. We talked about that. Right. Up to a thousand dollars.

Right. However, the LLC is not refundable. Okay. And so what does that mean? So that means that the LLC can reduce your tax liability down to zero Okay.

But you don't get any of it back Gotcha. If the credit amount exceeds your tax liability. So it can wipe out your tax liability It can. But you're not gonna get a check You're not gonna get a check. For the difference.

No. Okay. Good. Good. So that's a big consideration It is.

When you're deciding between the two. So it's something to really think about. Absolutely. And and that's where a tax professional Exactly. Can really help their clients out.

And absolutely guide them through the process. Now there are some other Yes. Tax benefits related to higher education Right. Besides the AOTC and the LLC. Right.

There are a few others that we should touch on. So let's hit those real quick. Correct. First of all, we have tax free student loan forgiveness. Yes.

This has been a hot topic. It has been a hot topic. Lot of changes. It has. Yeah.

So what do tax professionals need to know about this? Okay. So the main thing is that if your client receives student loan forgiveness Okay. Under programs like public service loan forgiveness or PSLF Right. Or through income driven repayment plan forgiveness Right.

They're typically gonna receive a form ten ninety nine c Okay. Which is cancellation of debt. Right. However, there's a big here. Yep.

Currently, federal student loan forgiveness is tax free Okay. Through the end of twenty twenty five. Okay. So this is a limited time offer. Temporary.

A temporary. Yes. Due to the American Rescue Plan Act of 2021. That's right. Okay.

So that's important. Very important for your clients to know. Right. Because if they're Yeah. Planning on having their loans forgiven Right.

They need to know that. They need to know that it's tax free right now. Right. But that might not always be the case. Okay.

Good. Good. What about Coverdell education savings accounts? Coverdell ESAs. Yes.

Those are still around. They are still around. What's the deal with those? So the Coverdell ESA, you can contribute up to $2,000 per year Okay. Per beneficiary.

Okay. And what are the qualified expenses for that? So this is what's cool about the Coverdell. Okay. It's not just for college.

Okay. It can be used for elementary school. Wow. Secondary school, post secondary education, even career school. Okay.

So it's very flexible. It is very flexible. In terms of the types of expenses it can cover Good. Good. But there are some income limits Oh.

For contributors. So if you're single, your MAGGI has to be less than a hundred and $10,000. Okay. And if you're married filing jointly Okay. It has to be less than $220,000.

Okay. So those are the income limits for contribution? For contributions. Yes. Okay.

Good. Good. And then the five twenty nine plans? The five twenty nine plans. Yes.

What about those? So 509 plans are also known as qualified tuition programs. Okay. And these are great for saving for education Okay. Because they allow you to either prepay tuition Okay.

Or contribute to a designated account. Okay. And the investments grow tax deferred. Okay. And the withdrawals are tax free Oh, okay.

As long as they're used for qualified education expenses. Okay. And there's also the ability to use that for student loan repayment. Yes. That's a new feature.

It is. You can use up to $10,000 per beneficiary Okay. To repay student loans. Good. Good.

And then finally Yeah. Series e and I bonds. Ah, the bonds. I'm sorry. How do those work?

So the interest on these bonds Okay. Can actually be tax free Okay. If you use the proceeds for qualified education expenses. But, again, there are income limits. Okay.

For single filers Okay. It's a hundred and $11,800. Okay. And for joint filers Okay. It's a hundred and $75,200.

Okay. And married filing separately Not eligible. Are not eligible. So Another thing to keep in mind. Something to think about Yes.

With your clients. Absolutely. Now so we've covered a lot here. We have. What do you think is the main takeaway?

The main takeaway. For tax professionals. For tax professionals. From this whole discussion on higher education tax benefits. I think the most important thing is to remember that there's no one size fits all solution.

Right. You have to look at each client's individual situation Right. Their income, their filing status The type of education. The type of education. And expenses.

Their expenses, everything. You really have to look at the big picture. The big picture. Yes. And make sure And tailor your advice.

That you're advising them to their specific needs. The best possible course of action. And that might change from year to year. It might. Right?

As their income changes Right. As their family situation changes Absolutely. As their students' education changes. Exactly. It's an ongoing process.

Right. So it's important to stay up to date on all of these laws. Absolutely. It's a lot to keep track of. It is.

It is. So just to kinda wrap things up Okay. Any last minute reminders for our listeners? A couple of key reminders. Yes.

Okay. First, make sure your clients are reviewing their form ten ninety eight e Yes, Lee. To make sure they're capturing all of their eligible student loan interest Okay. Including that utilized interest. Right.

Which we talked about. Which we talked about. And remember Yes. You can only deduct that capitalized interest in years when you made payments on the loan. Right.

And the second reminder The second reminder is to be mindful of that overlap between the AOTC and the LLC Right. For the same student in the same year. Okay. You can only pick one. Right.

So you gotta figure out which one's better. Right. And that might be a discussion with your client. It should be. Right.

Absolutely. It's a collaborative process. Exactly. You wanna work with your clients Right. To make sure they're getting the best possible outcome.

Absolutely. So communication is key. Communication is key. Alright. So this has been a great deep dive.

It has been. I think we covered a lot. A lot of good information. And hopefully, you tax professionals out there Yes. You're walking away with some new knowledge Absolutely.

Some new things to think about. And some new ways to help your clients. Absolutely. And so for our final thought today Okay. Given all of these tax benefits free status of federal student loan forgiveness.

Right. That's a big one. How might this evolving landscape influence your clients' long term financial planning? That's a good question. Right.

You know, how might this affect the strategies that you recommend For sure. When it comes to education planning and student loan debt management? It is a big question. It's something to really think about. You do.

It's multifaceted. It is. And it's gonna take Ongoing consideration. Ongoing consideration. Absolutely.

So keep that in mind as you're working with your clients. Absolutely. Alright. Well, thanks for joining us Thank you. For this deep dive.

We'll see you next time. See you later.