1. American Opportunity Tax Credit: This credit, which has expired and been reinstated numerous times in the past, is now permanent. The maximum American Opportunity Tax Credit (AOTC) of $2,500 covers qualified expenses like tuition, room and board, fees, supplies and equipment.
Notably, the AOTC is available for each student in your family. For example, if you have two kids in school at the same time, you can claim a maximum credit of $5,000. Furthermore, the AOTC is available for up to four years of school for each child.
But the credit is phased out based on modified adjusted gross income (MAGI).
For 2020, the phaseout range is between $80,000 and $90,000 of MAGI for single filers and $160,000 and $180,000 for joint filers.
2. Lifetime Learning Credit: The Lifetime Learning Credit (LLC) is also a permanent part of the tax code. However, unlike the AOTC, the maximum credit for qualified expenses is $2,000, instead of $2,500. Also, the LLC applies on a per-taxpayer basis. Therefore, if you have two children in school in 2020, the maximum credit remains $2,000.
The LLC is phased out at lower levels than the AOTC. The phase-out range for 2020 is between $59,000 and $69,000 of MAGI for single filers and $118,000 and $138,000 for joint filers.
Caution: Generally, you can claim either the AOTC or the LLC, but not both. Based on the comparisons stated above, the AOTC is favored by most taxpayers.
3. Tuition-and-fees deduction: This deduction for tuition and related fees, which technically had expired, was restored through 2020. But it can only be claimed in lieu of either one of the two tax credits, the AOTC and the LLC.
This deduction of either $4,000 or $2,000 is claimed “above the line,” depending on MAGI. For single filers, the $4,000 deduction is available for a MAGI up to $65,000 and $2,000 for a MAGI between $65,000 and $80,000. Joint filers can deduct $4,000 for a MAGI up to $130,000 and $2,000 if MAGI is between $130,000 and $160,000.
Currently, the deduction is scheduled to expire at the end of this year. But it could be reinstated again.
4. Student loan interest deduction: Congress recently eased the rules for repaying student loans in 2020. If you still pay interest on a loan this year, however, you can deduct the payments up to a maximum of $2,500. This deduction is also claimed above the line.
Note that the deduction for student loan interest is also subject to a phase-out. For 2020, the phase-out range for single filers is between $70,000 and $85,000 of MAGI and between $140,000 and $170,000 of MAGI for joint filers.
Be aware that the deduction is only available to a taxpayer obligated to repay the loan. Thus, the student—not the parents—often claims it.
Final lesson: Consult with your MMA & Co. tax advisor to maximize the current tax breaks for children in college.