Tuition and Fees Deduction
all the other tax breaks mentioned
on the list are credits, meaning they
directly cut your tax bill dollar for
dollar, but a deduction operates dif-
ferently, reducing the amount of
income you pay taxes on. Because of
this, “credits are more valuable than
deductions,” says Tobey.
Still, if you cannot use the
American Opportunity Credit or
the Lifetime Learning Credit, this
deduction can provide some wel-
come relief on education costs,
allowing up to $4,000 to be sub-
tracted from your taxable income
without having to itemize.
Your income must be $65,000 or
less, or $130,000 or less for married
couples filing jointly, to qualify for
the full $4,000 deduction. If your
income is above those thresholds but
below $80,000, or $160,000 if mar-
ried, then your maximum deduction
is capped at $2,000. Earn more than
that and you won’t get any help.
You can’t combine this deduction
with any of the other education cred-
its on your tax return.Student Loan Interest
Deduction
those paying off education loans
for their children’s schooling can off-
set some of the sting of such bills by
deducting up to $2,500 of the interest
paid on that debt in 2020 from their
taxable income, without itemizing.
Both federal and private edu-
cation loans count toward thisdeduction, as can credit card debt,
if it was only used to pay for qual-
ified education expenses. Any loans
made by a family member or quali-
fied employer plan for college costs,
however, don’t, says Allen.
To get the full deduction, your
income must be $70,000 or less, or
$140,000 or less for married couples.
If you earn more, the deduction will
gradually be reduced before phasing
out entirely for those making above
$85,000, or $170,000 for couples.
Be warned though that this tax
break might not be as rewarding as
it typically is thanks to COVID-19
relief measures passed by the govern-
ment in March last year, which sus-
pended loan payments and dropped
the interest rate to zero percent on
federal student loans owned by the
Education Department.529 Contribution Tax
Credit or Deduction
while the federal government
doesn’t reward parents for saving for
their kids’ college fund through a 529
plan, 34 states and Washington, D.C.
do, by offering either a state income
tax deduction or credit.
In most states, you’ll need to be
contributing to your home 529 plan,
rather than one offered by a rival
state, in order to get the tax deduc-
tion or credit, but seven don’t care
where you’ve parked those college
savings. Arizona, Arkansas, Kansas,
Minnesota, Missouri, Montana, and
Pennsylvania will all award a state tax
break for funding any plan.
Typically states allow either the
full amount or a portion of 529 plan
contributions to be deducted from
your taxable income, but Indiana,
Utah and Vermont offer a tax credit
instead, while Minnesota residents
may be eligible for either depending
on how much they make.NEWSWEEK.COM 19