Navigating the 2021 Education Tax Break Landscape: A Comprehensive Guide

Navigating the 2021 Education Tax Break Landscape: A Comprehensive Guide

Welcome back, I'm Stephanie Morris, CPA, and it's that time of the year again—time to dust off the pencils, grab those textbooks, and head back to school. As we embark on this educational journey, let's explore the intricate world of 2021 education tax breaks. A tax break, in simple terms, signifies a reduction in federal taxes for a specific reason. Given the significant cost of education, it's crucial for informed tax professionals to empower their clients with the knowledge needed to plan ahead and make the most of education-related tax benefits. In this comprehensive guide, I'll walk you through various education tax breaks, credits, exclusions, and other saving incentives. Class is in session!

Understanding Tax Deductions

Farewell to Tuition and Fees Deduction

Unfortunately, the Consolidated Appropriations Act (CAA) of 2021 brought an end to the tuition and fees deduction after the tax year 2020. This deduction, which was an adjustment ("above the line") for adjusted gross income (AGI), allowed taxpayers to claim up to $4,000. While this deduction is no longer available, there are still other avenues for tax relief.

Student Loan Interest Deduction

An "above the line" tax deduction for student loan interest is available, allowing taxpayers to claim up to $2,500. This deduction applies to interest used to pay qualified education expenses, including tuition and fees, required course materials, room and board, and other necessary education costs. For 2021, the deduction phases out for modified AGI between $70,000 and $80,000 (unmarried) and $140,000 and $170,000 (married filing jointly).

Exploring Tax Credits

Enhanced Education Credits

Two main education credits are available to taxpayers: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). To compensate for the loss of the tuition and fees deduction, the CAA increased the impact of the Lifetime Learning Credit. Taxpayers, however, can only claim one of these credits for expenses that qualify for both. Form 1098-T provides information for claiming these education credits.

American Opportunity Tax Credit (AOTC)

The AOTC allows a tax credit of up to $2,500 per student for the first four years of education after high school. The calculation involves 100 percent of the first $2,000 of eligible expenses paid by the taxpayer plus 25 percent of the next $2,000 of eligible expenses. Eligible expenses include tuition and fees, books, and required course materials. Room and board are not eligible, and the credit is phased out for AGI between $80,000 and $90,000 (unmarried) and $160,000 and $180,000 (married filing jointly). Forty percent of the AOTC is refundable.

Lifetime Learning Credit (LLC)

The LLC offers a tax credit of up to $2,000 per tax return with no limit on the number of years a taxpayer may claim it. Geared towards lifetime learning, the LLC covers undergraduate, graduate, and professional degree courses, including those for job skill improvement. The credit is 20 percent of a maximum of $10,000 eligible expenses, excluding course materials and room and board. The CAA of 2021 permanently increased phase-out thresholds to match those of the AOTC.

Tax Exclusions

Scholarship Income Exclusion

Scholarship amounts used to pay for tuition, fees, and required course-related materials can be excluded from income by college students. Athletic scholarships are also excludable if they are not payments for services and meet specific criteria outlined in Revenue Ruling 77-263.

Employer-Provided Educational Assistance

Employees can exclude up to $5,250 of employer-provided educational assistance used for tuition, fees, course-required materials, and even student loan payments for undergraduate and graduate education. This exclusion applies to payments made by employers after March 27, 2020, and before January 1, 2026.

Forgiven Student Loan Debt Exclusion

From 2021 to 2025, taxpayers can exclude from income any forgiven student loan debt. The loan proceeds must have been used to pay for qualified education expenses, including tuition and fees, required course-related materials, room and board, and other necessary educational expenses.

Interest on Education Savings Bonds Exclusion

The interest on qualified education savings bonds can be excluded from income when the proceeds of the bond redemption are used to pay eligible education expenses. This exclusion is phased out in 2021 for modified AGI between $82,350 and $97,350 (unmarried) and $122,550 and $153,550 (married).

Savings Incentives

Qualified Tuition Programs (529 Plans)

Earnings on investments in 529 plans may be excluded from income if used to pay for qualifying education expenses. This includes tuition and fees, required course materials, and room and board (if the student is enrolled at least half-time) for undergraduate and graduate education. Additionally, up to $10,000 per beneficiary per year may be used for K-12 tuition expenses. A lifetime limit of $10,000 per borrower can be used to repay student loan principal and interest. Contribution limits vary by state, and there are no AGI limitations.

Coverdell Education Savings Account

Contributions of up to $2,000 per beneficiary per year are allowed under the Coverdell Education Savings Account. Earnings on investments are not taxed if used for K-12 or higher education eligible expenses. Contributions are phased out for taxpayers with AGI between $95,000 and $110,000 (unmarried) and $190,000 and $220,000 (married).

It's imperative for tax preparers to have a comprehensive understanding of the various education tax breaks to effectively assist clients with special considerations related to educational tax benefits. This guide is intended for informational purposes only, and for personalized advice, it's advisable to consult with a tax advisor. For further updates and essential information, continue reading the Vishal blog for tax professionals, accountants, and CPAs.

If you need a refresher on tax law changes in 2021, head to Vishal’s Tax Resource Center for the latest news and tax resources to prepare for the upcoming tax season.


  • Congressional Research Service: Higher Education Tax Benefits: Brief Overview and Budgetary Effects
  • Internal Revenue Service: Tax Benefits for Education Information Center

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