Gavin Howe
Law students, like other students, may be eligible for tax breaks. These include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC allows students to take a tax credit of up to $2,500 for tuition, fees, and course materials for an undergraduate education. The LLC is available to vocational, graduate, and non-degree students and is worth up to $2,000 per tax return. Students can also deduct interest paid on student loans from their taxes, up to $2,500 per year. Additionally, there are tax breaks for saving for college, such as 529 plans and tax-free savings bonds.
| Characteristics | Values |
|---|---|
| American Opportunity Tax Credit | Up to $2,500 per eligible student |
| Lifetime Learning Credit | Up to $2,000 per tax return, per year |
| Student Loan Interest Deduction | Up to $2,500 |
| Tuition and Fees Deduction | Up to $4,000 |
| 529 College Savings Plans | Vary by state |
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What You'll Learn
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student's postsecondary education. The maximum annual credit is $2,500 per eligible student. The student, or someone claiming the student as a dependent, can claim the AOTC on their tax return.
The AOTC helps offset the costs of postsecondary education for students or their parents (if the student is a dependent). It allows an annual $2,500 tax credit for qualified tuition expenses, school fees, and course materials. Room and board, medical costs, transportation, and insurance do not qualify as expenses.
To claim the credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less if married and filing jointly). The credit begins to decrease if your MAGI is above $80,000 but less than $90,000 ($160,000-$180,000 for married filing jointly) and disappears entirely if your MAGI is above $90,000 ($180,000 for joint filers).
To be eligible for the AOTC, the student must:
- Be pursuing a degree or other recognised education credential
- Be enrolled at least half-time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope Credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
To claim the AOTC, you must complete Form 8863 and attach it to your tax return. You must also receive Internal Revenue Service (IRS) Form 1098-T from an eligible school to claim the credit.
The AOTC is a partially refundable tax credit, meaning that if your tax liability is reduced to $0, you can receive a refund of up to $1,000 (40%) of the credit.
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Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a provision of the U.S. federal income tax code that lets students and parents lower their tax liability by up to $2,000 to help offset higher education expenses. This credit is worth 20% of the first $10,000 of qualified education expenses per tax return.
The LLC is available to vocational, graduate, and non-degree or vocational students. It can be used to pay for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. There is no limit on the number of years you can claim this credit.
To be eligible for the LLC, you must meet the following requirements:
- You, your dependent, or a third party must pay qualified education expenses for higher education.
- You, your dependent, or a third party must pay the education expenses for an eligible student enrolled at an eligible educational institution.
- The eligible student must be yourself, your spouse, or a dependent you list on your tax return.
To claim the LLC, you must complete Form 8863 and attach it to your Form 1040 or Form 1040-SR. You can include the cost of tuition, fees, and any books or supplies that you are required to purchase directly from the school as long as it is a condition of enrollment.
It is important to note that you cannot claim the LLC and the American Opportunity Credit in the same year for a single student. The IRS only allows one tax credit per student, per year.
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Student Loan Interest Deduction
The US government allows a student loan interest deduction for those who have paid interest on a qualified student loan in the tax year. This deduction is applicable to those who are legally obliged to pay interest on a qualified student loan and are not filing as married filing separately. The student loan interest deduction is also subject to income limits, which are set annually.
A qualified student loan is a loan taken out solely to pay for higher education expenses, including tuition, fees, and course materials. The loan must have been taken out for the taxpayer, their spouse, or a dependent, and the education must have been provided during an academic period for an eligible student. The expenses must have been incurred within a reasonable period of time before or after taking out the loan.
The student loan interest deduction allows individuals to deduct up to $2,500 of interest paid from their income when calculating their adjusted gross income (AGI). This deduction is "above the line", meaning it is an adjustment to taxable income, and individuals do not need to itemize their taxes to claim it. The deduction can reduce the amount of taxable income by up to $2,500 and may even lower an individual's tax bracket.
For those filing as Married Filing Jointly, the full $2,500 deduction can be claimed if the modified adjusted gross income (MAGI) is $155,000 or less. The deduction is gradually reduced for MAGIs between $155,000 and $185,000, and it cannot be claimed if the MAGI is $185,000 or more. For those filing as Single, Head of Household, or Qualified Surviving Spouse, the full $2,500 deduction can be claimed if the MAGI is $75,000 or less. The deduction is gradually reduced for MAGIs between $75,000 and $90,000, and it cannot be claimed if the MAGI is $90,000 or more.
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Tuition and Fees Deduction
The Tuition and Fees Deduction was extended through the end of 2020. It allows you to deduct up to $4,000 from your income for qualifying tuition expenses paid for you, your spouse, or your dependents. The deduction amount is $4,000 for Modified Adjusted Gross Income (MAGI) of $65,000 or less ($130,000 or less for joint returns), $2,000 for MAGI between $65,001 and $80,000 (between $130,001 and $160,000 for joint returns), and $0 if your MAGI exceeds these limits.
Qualifying expenses include tuition and mandatory enrollment fees to attend any accredited public or private institution above the high school level. You cannot claim a deduction for room and board, optional fees (such as student health insurance), transportation, or other similar personal expenses. You can also include course-related books and supplies as qualifying expenses if you are required to buy them directly from the school.
You must subtract any scholarships, educational assistance, or other nontaxable income spent for educational purposes (other than gifts or inheritances) from your qualifying expenses. For example, if your employer offers a tuition reimbursement plan as a fringe benefit that pays $1,000 of the cost of a $1,500 course, only the remaining $500 would count for deduction purposes.
You can't deduct or take a credit for the same expense twice. The Tuition and Fees Deduction cannot be combined with the American Opportunity or Lifetime Learning credits for any single student in a single tax year. If you deduct these expenses under some other provision of the tax code, such as for employee or business expenses, you cannot also deduct the expenses for the Tuition and Fees Deduction.
If you already filed your return for a prior year and now want to claim the Tuition and Fees Deduction for that year, you can do so by filing an amended return on Form 1040-X, Amended U.S. Individual Income Tax Return. Amended returns can take up to 16 weeks to process.
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529 College Savings Plans
A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. It is a powerful tool that parents and family members can use to save for a child's education. The money invested in a 529 college savings plan grows tax-deferred, and qualified distributions are tax-free. Families may also be eligible for a state income tax deduction or credit for 529 plan contributions, depending on where they live.
There are two major types of 529 plans: 529 tax advantage and 529 prepaid plans. The 529 tax advantage is the most popular 529 plan and has strong tax advantages. Your investments grow tax-free, and you also withdraw funds tax-free for education expenses, such as tuition, room and board, and assigned textbooks. You can use withdrawals from education savings plan accounts at any college or university, and some trade schools. You can also use your education savings plan to pay up to $10,000 per year, per beneficiary, for tuition at any public, private, or religious elementary or secondary school.
The funds you accumulate in a 529 plan can be used to pay the full amount of your tuition and fees for vocational and trade school, public, private, or parochial elementary and secondary school. Attendance does not necessarily need to be physical, as you can also use a 529 plan to pay for online college courses. As long as the college you're enrolling in is an eligible institution (meaning that the institution is eligible for Title IV federal student aid), you can use a 529 plan to pay for online tuition and fees.
In addition to tuition and fees, you can use your 529 plan to pay for other education expenses, including:
- Computers, software, and internet access
- Room and board
- Special needs equipment
- Transportation and travel costs
- College application and testing fees
- Extracurricular activity fees
It's important to note that there are rules and limitations regarding what expenses qualify for 529 plan funds. For example, you can only use a 529 plan to pay for transportation and travel costs if your college charges a travel or transportation cost as part of a comprehensive tuition fee. Additionally, you can only use a 529 plan to pay for books and supplies that are required for a class, not for additional or optional reading.
While 529 plans offer many benefits, it's important to consider the potential drawbacks. If you withdraw money from your 529 plan for non-qualified expenses, you may incur income taxes and penalties. Additionally, there may be state-specific penalties for non-qualified withdrawals. It's also important to consider the impact of 529 plans on financial aid eligibility, as 529 plan assets are considered assets of the account owner, not the beneficiary.
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Frequently asked questions
Yes, law students can benefit from tax breaks.
The American Opportunity Tax Credit (AOTC) is a tax credit of up to $2,500 for tuition, fees, and course materials paid during the first four years of college. It is available to single filers with a modified adjusted gross income (MAGI) of up to $80,000 and to married joint filers with a MAGI of up to $160,000. 40% of the credit, or up to $1,000, can be refunded even if no taxes are owed for the year.
The Lifetime Learning Credit (LLC) is a tax credit worth up to $2,000 per tax return, per year, for vocational, graduate, and non-degree or vocational students. It is available to joint filers with a MAGI under $138,000 and to single filers with an income of less than $69,000.
The Student Loan Interest Deduction allows students and parents to deduct up to $2,500 in interest paid per year on student loans without having to file an itemized return. This deduction is available to those whose MAGI is less than $80,000 ($160,000 for joint filers).
The 529 College Savings Plan is a state-sponsored plan that allows money to be invested and grow tax-free. The funds can then be withdrawn tax-free to pay for eligible education expenses, including certain apprenticeship programs and student loan repayments.
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