Families with college students might be eligible for certain tax deductions or credits on their 2021 taxes. But accounting for them properly can be a challenge.

That is because the rules are complicated and taxpayers generally can’t claim more than one benefit for the same qualifying education expense. Here are some things to consider:

Tax deductions
If you, your spouse or dependent paid student-loan interest last year and meet other qualifications, you may be eligible for a deduction of up to $2,500. Those who qualify can take this deduction regardless of whether they itemize. One requirement is that the filer’s modified adjusted gross income be less than $85,000, or $170,000 if filing jointly. This deduction can be used for both federal and private loans, says Joe DePaulo, chief executive officer and co-founder of College Ave Student Loans, a private student-loan provider.

Tax credits
For 2021, there are two tax credits that can help eligible taxpayers offset higher-education costs by reducing their income tax. These are the American Opportunity Credit and the Lifetime Learning Credit. IRS rules allow you to claim only one of the credits per eligible student in the same tax year, so families need to determine which credit is best for their circumstances. The American Opportunity Credit, for example, has a higher maximum, $2,500 per student vs. $2,000 per tax return for the Lifetime Learning Credit, but it can only be claimed for four tax years for the same student. The Lifetime Learning Credit, meanwhile, is broader in that it can be claimed through grad school or for courses to acquire or improve job skills. The AOC also has additional conditions such as the requirement to be enrolled at least half time in a degree program.



Taxpayers can’t claim either credit if their modified adjusted gross income is $90,000 or more, or $180,000 or more for joint filers. For those who have the choice, the American Opportunity Credit will always be greater, according to the IRS.

Calculate 529-plan taxable distributions
Distributions from “529” plans aren’t taxable when used to pay for qualified higher-education expenses. However, if you use these moneys for nonqualified expenses or take more in total distributions than your qualified expenses, be prepared to pay income tax and a 10% penalty. Keep in mind that the tax-free part of scholarships or grants reduces qualified education expenses. Also, an education-related tax credit can be claimed in the same year the beneficiary takes a tax-free distribution from a 529 plan, but the same expenses can’t be used for both benefits, according to IRS rules.

ScholarshipsIn many cases, institutional or private scholarships and grants won’t count as taxable income. There are some stipulations, though. For instance, the amounts received must be used to pay for tuition and fees required for enrollment or attendance, or for fees, books, supplies and equipment required for your coursework. Scholarship amounts used for incidental expenses, such as room and board, travel and optional equipment, must be included in gross income. An additional condition applies if you are paid for teaching or research on condition of receiving the scholarship. The amount you receive for that work generally must be included in gross income, with certain exceptions.

Income from student-loan forgiveness
Generally, if a borrower’s loan is canceled or repaid by someone else, that portion of the loan should be included in gross income, according to the IRS. There are some exceptions, such as student-loan amounts forgiven under the Public Service Loan Forgiveness Program. In 2021—and at least through 2025—borrowers who don’t qualify for PSLF have a reprieve from taxes on forgiven amounts, thanks to the American Rescue Plan Act of 2021. This helps borrowers who have achieved or will achieve forgiveness in the next few years under an income-driven repayment plan, which is based on income and family size.

Taxpayers looking for additional information on any of these strategies can contact their tax preparer or refer to IRS Publication 970.

LINK: https://www.wsj.com/articles/c...86142?mod=hp_jr_pos2

Just another example of the Bullshit that is our tax code. I stopped claiming my 21 year old son two years ago. He was worth about $500 less in taxes for me, but by claiming himself, he gets the education credits I would miss out on and the government pays him more each year than he pays in taxes. He made about $20k last year working part time at Target. Got all the taxes withheld back and an additional $1,000.

I don't expect sympathy, I earn over the 180k mark so basically the government fucks me every way possible.