Search
Close this search box.

Education Tax Credits and Deductions

Quote of the Week

 “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” – Warren Buffet

Technical Corner

Major indexes closed near fresh all-time highs last week as the U.S. and Iran took a step back avoiding further escalation in geopolitical tensions. Iran retaliated to the recent killing of its general by striking against U.S. military bases in Iraq, but there were no casualties, Mr. Trump then softened his comments. As a result, oil declined 6% on the week, recording its worst weekly performance since July of 2019.

On the economic front, the December jobs report marked a slowdown in job gains. In the chart below, job growth last year slowed from 2018. Wage growth also has started to soften.

The overall economy is also slowing rather rapidly. Projections for fourth quarter GDP are all over the lot. The Atlanta Fed is projecting +2.00 % and Hedgeye is predicting +0.03%.  That is quite a spread, so we will have to wait until January 30 for the official report.

We are re-allocating the portfolios this week. Conditions have changed and may probably change even more after the GDP report comes out at the end of January. The biggest change is that we are selling our position in Short-term Government bonds and Tips to extend the duration to longer-term U.S. Treasury bonds. The reason we are extending the duration is to take advantage of declining interest rates which should happen if the GDP report comes in showing little or no growth for the fourth quarter. We are also selling our small positions in Canada and Coco. We are adding Global bonds and Gold Miners and keeping our positions in REITs, Utilities, precious metals, and energy.

Stephanie’s Thoughts

Education Tax Credits and Deductions

For parents and students trying to manage college bills and student loan payments, the federal government offers education-related tax benefits. The requirements for each are different, so here’s what you need to know.

American Opportunity credit

The American Opportunity credit (formerly the Hope credit) is a tax credit available for the first four years of a student’s undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2020 (it’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and parents must claim their child as a dependent on their tax return to take the credit.

To be eligible for the credit, your income must fall below certain limits. In 2020, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.

One benefit of the American Opportunity credit is that it’s calculated per student, not per tax return. So parents with two (or more) qualifying children in a given year can claim a separate credit for each child (assuming income limits are met).

The mechanics of claiming the credit are relatively easy. If you paid tuition and related expenses to an eligible educational institution during the year, the college generally must send you a Form 1098-T by February 1 of the following year. You then file Form 8863 with your federal tax return to claim the credit.

Lifetime Learning credit

The Lifetime Learning credit is another education tax credit, but it has a broader reach than the American Opportunity credit. As the name implies, the Lifetime Learning credit is available for college or graduate courses taken throughout your lifetime (the student can be you, your spouse, or your dependents), even if those courses are taken on a less than half-time basis and don’t lead to a formal degree. However, this credit can’t be taken in the same year as the American Opportunity credit on behalf of the same student.

The Lifetime Learning credit is worth up to $2,000 in 2020 (it’s calculated as 20% of the first $10,000 of qualified expenses). The Lifetime Learning credit must be taken for the same year that expenses are paid, and you must file Form 8863 with your federal tax return to claim the credit. In 2020, a full credit is available to single filers with a MAGI below $59,000 and joint filers with a MAGI below $118,000. A partial credit is available to single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000.

Unlike the American Opportunity credit, the Lifetime Learning credit is limited to $2,000 per tax return per year, even if more than one person in your household qualifies independently in a given year.

If you have more than one family member attending college or taking courses at the same time, you’ll need to decide which credit to take.

Joe and Ann have a college freshman and sophomore, Mary and Ben, who are attending school full-time. In addition, Joe is enrolled at a local community college taking two graduate courses related to his job. Mary and Ben each qualify for the American Opportunity credit. Plus, Mary, Ben, and Joe each qualify for the Lifetime Learning credit. Because the American Opportunity credit isn’t limited to one per tax return, Joe and Ann should claim this credit for both Mary and Ben, and then claim a Lifetime Learning credit for Joe. Joe and Ann can claim both the American Opportunity credit and the Lifetime Learning credit in the same year because each credit is taken on behalf of a different qualified student.

Student loan interest deduction

The student loan interest deduction allows borrowers to deduct up to $2,500 worth of interest paid on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However, the debt must have been incurred while the student was attending school on at least a half-time basis in a program leading to a degree, certificate, or other recognized educational credential. So loans obtained to take courses that do not lead to a degree or other educational credential are not eligible for this deduction.

Your ability to take the student loan interest deduction depends on your income. For 2020, to take the full $2,500 deduction (assuming that much interest is paid during the year) single filers must have a MAGI of $70,000 or less and joint filers $140,000 or less. A partial deduction is available for single filers with a MAGI between $70,000 and $85,000 and joint filers with a MAGI between $140,000 and $170,000.

Also, to be eligible for the deduction, an individual must have the primary obligation to pay the loan and must pay the interest during the tax year. The deduction may not be claimed by someone who can be claimed as a dependent on another taxpayer’s return. Borrowers can take the student loan interest deduction in the same year as the American Opportunity credit or Lifetime Learning credit, provided they qualify for each independently.

Deduction for qualified higher education expenses

The deduction for qualified higher education expenses is not available in 2020 (or 2019). The last year is was available was in tax year 2017. In 2017, it was worth up to $4,000 for out-of-pocket qualified higher education expenses paid during the year; single filers with a modified gross income (MAGI) of $65,000 or less and joint filers with a MAGI of $130,000 or less could take the full $4,000 deduction. A $2,000 deduction was available for single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $130,000 and $160,000.

Comparison of Credits/Deductions

 MAGI limits for 2020Qualified expenses include
American Opportunity credit$2,500Single filer: $80,000 or less for full credit; partial credit if MAGI $80,000 to $90,000Joint filer: $160,000 or less for full credit; partial credit if MAGI $160,000 to $180,000Tuition and fees, plus course materials
Lifetime Learning credit$2,000Single filer: $59,000 or less for full credit; partial credit if MAGI $59,000 to $69,000Joint filer: $118,000 or less for full credit; partial credit if MAGI $118,000 to $138,000Tuition and fees only
Student loan interest deduction$2,500Single filer: $70,000 or less for full deduction, partial deduction if MAGI $70,000 to $85,000Joint filer: $140,000 or less for full deduction; partial deduction if MAGI $140,000 to $170,000Tuition and fees, room and board, books, equipment, and other necessary expenses
Deduction qualified higher education expenses$4,000 (full); $2,000 (partial)Deduction not available in 2020Tuition and fees only

For more information, see IRS Publication 970.

Copyright 2020 Broadridge Investor Communication Solutions, Inc

If you have friends or family in need of financial life planning services,

It would be the honor of Laurence Lof Financial Advisors to assist them.

We value your referrals!

These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Laurence Lof Financial Advisors, LLC are not affiliated. Laurence Lof Financial Advisors 4757 E Camp Lowell Drive Tucson AZ 85712 info@lofadvisors.com

Sign Up For Our Newsletter

Lof Advisors Logo
Client Login
Cambridge Statements Login
Wealthscape
Login
Pershing
Login
State Disclosure: Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SPIC. Investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Lof Laurence Lof Financial Advisors, LLC are not affiliated. Investment products and services available only to residents of: Arizona (AZ), California (CA), Colorado (CO), Florida (FL), Idaho (ID), Indiana (IN), Michigan (MI), Massachusetts (MA), Minnesota (MN), Montana (MT), North Carolina (NC), North Dakota (ND), New Mexico (NM), Oregon (OR), Ohio (OH), Pennsylvania (PA), Texas (TX), Virginia (VA), Wisconsin (Wl), Wyoming (WY). We are licensed to sell insurance products in the following states of: Arizona (AZ), California (CA), Colorado (CO), Florida (FL), Idaho (ID), Indiana (IN), Michigan (MI), Montana (MT), North Dakota (ND), New Mexico (NM), Oregon (OR), Pennsylvania (PA), Virginia (VA), Wisconsin (Wl).
State Disclosure: Due to various state regulations and registration requirements concerning the dissemination of information regarding investment products and services, we are currently required to limit access of the following pages to individuals residing in states where we are currently registered. By continuing to use this site, you acknowledge that you are a resident of one of the states listed. A broker/dealer, investment advisor, BD agent or IA rep may only transact business in a particular state after licensure or satisfying qualifications requirements of that state, or only if they are excluded or exempted from the states broker/dealer, investment adviser, or BD agent or IA rep requirements, as the case may be; and follow-up, individualized responses to consumers in a particular state by broker/dealer, investment adviser, BD agent or IA rep that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, shall not be made without first complying with the states broker/dealer, investment adviser, BD agent or IA rep requirements, or pursuant to an applicable state exemption or exclusion. Check the background of this investment professional on FINRA’s BrokerCheck.
Call Now Button