There are several education-related tax deductions, credits, and exclusions from income to be considered if you either attend or have children who attend, eligible educational institutions.

Tax-Free Distributions from Qualified Tuition Programs: A Code Sec. 529 qualified tuition plan is a taxadvantaged investment vehicle designed to encouraging saving for the future education expenses of the plan beneficiary. Tax-free distributions from a Code Sec. 529 qualified tuition program (QTP) of up to $10,000.00 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, i.e., kindergarten through grade 12. It also includes expenses for fees, books, supplies, and equipment required for the
participation in certain apprenticeship programs and qualified education loan repayments in limited amounts. A special rule also allows tax-free distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account. However, if the total QTP distribution to a designated beneficiary exceed the adjusted qualified higher education expenses of that beneficiary for the year, a portion of those distributions is taxable to the beneficiary. Code Sec. 529(c)(6) also provides that an additional 10 percent penalty tax generally applies to a taxable distribution from a QTP.

Education Credits: If you pay qualified education expenses and have modified adjusted gross income below $80,000 or $160,000 (for joint filers), you may be eligible for an American Opportunity Tax Credit of up to $2,500 per year for each eligible student. Above those income thresholds, a partial credit may be available. The amount of the credit for each student is computed as 100 percent of the first $2,000 of qualified education expenses paid for the student and 25 percent of the next $2,000 of such expenses paid. Additionally, a Lifetime Learning Credit may be available in an amount equal to 20 percent of the qualified tuition and related expenses paid during the tax year (for education furnished during any academic period beginning in such tax year) up to a maximum of $10,000. However, the expenses taken into account for this credit cannot be the same as expenses taken into account for the American Opportunity Tax Credit. The credit is phased out for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Exclusion from Income for Repayment of Student Loan Debt: On August 24, President Biden announced a student loan relief plan that includes loan forgiveness for certain qualifying borrowers. Under the plan, borrowers with adjusted gross income under $125,000 (for individuals filing as single or married filing separately) or under $250,000 (for individuals filing as married filing jointly, head of household, or qualifying widower) for either 2020 or 2021 will generally receive up to $10,000 of federal student loan forgiveness, while Pell grant recipients receive up to $20,000 of loan forgiveness. Under Code Sec. 108(f)(5), enacted by the American Rescue Plan Act of 2021, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of a student loan occurring after December 31, 2020, and before January 1, 2026. However, such loan forgiveness could be subject to state and local income taxes.

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