The Consolidated Appropriations Act (CAA) eases things for some parents of college students.
The CAA repeals the tuition-and-fees deduction once and for all. So you no longer have to choose between the deduction and a higher education tax credit.
However, as under prior law, you can only claim one of the two education credits for a particular student. And another CAA change complicates matters.
Prior to 2021, you could deduct tuition-and-fee expenses, subject to a phase-out, in lieu of a higher education credit. The deduction had expired and been reinstated numerous times. Now the CAA repeals the deduction for 2021 and beyond.
But you still must decide between claiming the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) for qualified higher education expenses.
- AOTC. The maximum annual credit of $2,500 is available for up to four ears of undergraduate study for every eligible student in the family. For example, if you have two kids in college, the maximum credit is doubled to $5,00. However, the AOTC is phased out between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers and $160,000 and $180,000 for joint filers. (These phase-out ranges are not indexed for inflation.)
- LLC. The maximum credit is $2,000 compared to $2,500 for the AOTC. Also, unlike the AOTC, the LLC credit is a one-per-taxpayer deal. So, if you have two children in school this year, the maximum credit is $2,000. On the plus side, the LLC is available for all years of study, not just the first four years.
For 2020, the LLC is phased out at a lower level than the AOTC. The phase-out range is between $59,000 to $69,000 of MAGI for single filers and $118,000 to $138,000 for joint filers.
New law update: Beginning in 2021, the CAA increases the phase-out ranges for the LLC to match those for the AOTC. But the maximum LLC remains $2,000 per taxpayer for 2021 and beyond. Therefore, unless your child goes past a fourth year of study, you are better off with the AOTC.
Small Business Tax Strategies