The way to account for shared education items in your tax return.
If you’d education-related expenditures – student loans, tuition, registration fees – or obtained a hand through grants or scholarships to pay some expenses, your pile of tax-related paperwork is most likely somewhat taller this season.
Here’s things to do using the info on these 1098-Es and 1098-Ts to squeeze a larger tax refund.
Student loan interest deduction
If you created student loan obligations in 2020, tax year is the chance to obtain just a small relief. Even though it might pale compared to the overall payments you made in your loans this past year, taxpayers that qualify may pay up to $2,500 in student loan interest in your income tax return.
The student loan interest deduction is also a above-the-line deduction, meaning it is a deduction until you arrive in the adjusted gross income (AGI). Even in the event that you don’t itemize deductions, then you are still able to deduct it.
Eligibility: The student loan interest rate is only available if your modified adjusted gross income (MAGI) – that is generally your adjusted gross earnings any student loan interest deduction – isn’t too high. For 2020 if your MAGI is greater than $85,000 (if filing single) or $170,000 (if you’re married filing jointly), unfortunately you don’t be eligible for the deduction.
How to obtain itYou’ll get Form 1098-E for every account where you held a student loan. Add up the numbers from Box 1 and also include the entire deduction in your tax return.
Tuition and fees pops
The IRS also offers tax credits onto education-related expenditures. This 1’s to you whether you paid fees, tuition, class materials and everything needed to get a pupil to attend or be registered at an eligible educational institution. FYI: "An eligible educational institution" isn’t just a four-year college or university, either. Vocational schools and other post-secondary education institutions, such as community college, also count.
There are two education credits:
- The American Opportunity Tax Credit: A partially refundable tax credit up to $2,500 annually for four years.
- The Lifetime Learning Credit: A non-refundable tax credit up to $2,000 annually with no time limit.
Eligibility: Depending on your MAGI, you may be eligible for an education tax credit or the tuition and fees deduction. Word to the wise: if you are claiming a dependent, and that dependent paid his/her own tuition, YOU still obtain to claim the education tax credit. (If your dependent says that seems unfair, tell them to take it up with your local Congressperson!)
How to obtain it: You’ll receive Form 1098-T from the eligible educational institution where you are paying tuition. Enter the tuition payments (from Box 1) on your return.
If you took out student loans to pay for tuition, you better make sure that you’re able to obtain any deductions or credits that you can.
Tuition and fees deductions
Like the student loan interest deduction, the tuition and fees deduction is an above-the-line deduction of up to $4,000. Although this education-related tax break was set to expire, The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended it through Dec. 31, 2020.
Here’s the catch: You’re not allowed to claim both the tuition and fees deduction and one of the two education tax credits outlined above. Your tax preparer or tax preparation software typically optimizes to see which is more advantageous for you (as in gets you a bigger refund).
Scholarships and fellowship grants
Along with tuition payments you made, scholarships and grants you received are also reported on Form 1098-T. Whether or not these will be taxed is based on how you (or your dependent) used the money.
If it went to pay for qualified education expenses (tuition, books, and other supplies needed for a specific course), your scholarship or fellowship grant is not taxable.
It’s a different story if there was any work requirement to receive the grant. For example, let’s say that Tony Stark received a $5,000 fellowship grant that required him to teach part-time. The university that awarded the grant considers $1,500 of it as income for teaching for which he receives a W-2. As he prepares his taxes, Tony is only able to exclude potentially up to $3,500 of the grant from his taxable income.
Make sure you take all the breaks you’re allowed
Optimizing your education deductions and credits usually means delving a little deeper into the details rather than simply entering the info from a tax form from your university,
More tax prep help on Intexchange:
- Does Your Child Have to File a Tax Return?
- Use This List to Save Money on Tax Prep This Year
- When to Keep and When to Throw Away Financial Documents