College and graduate school got a little more expensive for as many as 1.7 million middle- (and upper-middle-) class families in 2017.
Congress failed to renew the tuition and fees federal income tax deduction for 2017 — and Washington insiders say it’s impossible to predict whether lawmakers will retroactively renew the deduction this year, as they have in the past. As a result, many students (and their parents) should be bracing for higher tax bills next year. (The deduction was in effect in 2016, so you’ll be able to use it on the 1040 you file this spring.)
The Internal Revenue Service reports that more than 1.7 million filers used the deduction in 2014 (the last year for which data is available), deducting an average of almost $2,200 apiece. If they were in the 20% bracket, that would have cut their tax bills by more than $400.
That’s actually a small share of the taxpayers who get some sort of education-related tax break. The change in the tax code only affects those paying for graduate school — or a fifth or sixth year of undergraduate studies — who fall within these income bands: Singles earning between $65,000 and $80,000, and couples earning between $130,000 and $160,000. People earning more than that weren’t eligible for the deduction in the first place; and people earning less or paying for the first four years of undergrad are able to take more valuable tax breaks.
Tax Credits Survive
On the plus side, the vast majority of tuition-paying parents and students — including many of those who filed for the tuition and fees deduction — will still be eligible for those more lucrative tax credits, such as the American Opportunity Tax Credit and the Lifetime Learning Credit.
Credits are generally considered superior to deductions because they reduce your tax bill dollar for dollar. And more than 10.2 million filers took advantage of these education tax credits in 2014, cutting their tax bills by an average of more than $1,700.
The AOTC is the most lucrative tax break of all. You can get a federal tax credit of as much as $2,500 per year for up to $4,000 a year in tuition; the credit is available for a maximum four years of undergraduate tuition payments per student. (And those who owe no taxes can get a check from the federal government for up to $1,000.) The AOTC is available to singles with modified adjusted gross incomes up to $90,000 a year, and couples with incomes of up to $180,000, although it phases down at higher incomes.
The Lifetime Learning Credit can kick in after you’ve used up your AOTC. You can get a 20% credit on up to $10,000 a year on tuition payments, and can use it for as many years as you have tuition payments, for any accredited college or graduate program. But there’s a more restrictive income limit: The LLC is only available to singles earning up to $65,000 a year, or couples earning up to $130,000 a year.
So who was getting the deduction? It was largely getting used by families who had used up their four years of AOTC and earned too much to qualify for the LLC. For example, couples who earned between $130,000 and $160,000 could deduct as much as $4,000 a year from their taxable income using the deduction.
End to Overpayments?
There’s one other bright spot: Studies have found that many people who used the deduction were actually overpaying taxes, because they weren’t taking the more lucrative credits they qualified for.
Steven Bloom, director of government relations for the American Council on Education, the largest association of colleges, notes that the two education credits don’t have a looming end date, and are generally better for families — especially low- and middle- income families. His organization is one of many that has supported a simplification of the education tax breaks. “They are too complicated,” he says.
But for those who fall in the affected income band, “there isn’t much you can do” to replace the missing deduction, says Jackie Perlman, principal tax research analyst for the Tax Institute at H&R Block.