Education-Related Changes for 2015 and Beyond

The Protecting Americans from Tax Hikes (PATH) Act of 2015, which extended permanently or temporarily dozens of tax rules, impacts various breaks for education and educators. The changes affect 2015 returns as well as tax planning for 2016 and beyond. Here’s a roundup of these changes.

1. American opportunity credit

The American opportunity credit allows you to offset your tax liability by up to $2,500 per eligible student for each of the first four years of college. The credit is subject to an income limitation, based on modified adjusted gross income:

• Singles: Full credit for MAGI up to $80,000; partial credit for MAGI between $80,000 and $90,000.
• Joint filers: Full credit for MAGI up to $160,000; partial credit for MAGI between $160,000 and $180,000.

The credit had been set to expire at the end of 2017, but has been made permanent.

Changes in reporting rules.You must include the educational institution’s employer identification number (EIN) when claiming the credit. This will be provided on Form 1098-T; the institution is required to provide it. The institution is required to report only tuition and qualified expenses actually received (rather than billed) on the form. Also, tax return preparers are subject to new due diligence rules. They are required to make inquiries before entering the refundable credit on a tax return. They can be penalized for failing to do this due diligence.

The changes in reporting rules apply for tax years beginning after 2015 (impacting 2016 returns filed in 2017).

2. 529 plans

Contributions to these plans are not deductible for federal income tax purposes, but withdrawals for to pay for qualified education expenses in any dollar amount are tax free. The new law adds two new categories of education expenses:

• Computers and peripheral equipment (e.g., printers, Internet access). This change is retroactive to the start of 2015.
• Rollovers to ABLE accounts. However, the rollover is limited to the annual ABLE contribution, which is the gift tax exclusion amount (e.g., $14,000 in 2016). If the rollover is larger than this amount, the beneficiary of the ABLE account (not the 529 plan) is penalized.

Also, for a designated beneficiary who receives a refund of any higher education expenses, any distribution that was used to pay the refunded expenses shall not be subject to tax if the designated beneficiary recontributes the refunded amount to the qualified tuition program within 60 days of receiving the refund, but only to the extent that such recontribution is not in excess of the refund. Under a transition rule, refunds after December 31, 2014, and before December 18, 2015, have 60 days from December 18, 2015, to be recontributed.

3. Educator expenses

Elementary and secondary school teachers can deduct out-of-pocket classroom expenses up to $250. This tax break had expired at the end of 2014, but it is now permanent.

Starting this year, the $250 can be adjusted annually for inflation. What’s more, professional development courses qualify for the deduction.

4. Tuition and fees deduction

The above-the-line deduction for tuition and fees for higher education has been extended for 2015 and 2016. The rules for this deduction remain unchanged. Thus, the $4,000 credit is limited to those with adjusted gross income up to $65,000 ($130,000 for joint filers). A $2,000 deduction can be claimed for those with AGI between $65,000 and $80,000 ($130,000 and $160,000 for joint filers). The deduction is not subject to a phase-out, so one dollar of AGI over $80,000 ($160,000 for joint filers) bars any deduction.

Conclusion

There are many other tax breaks for education, including an extension for scholarships and fellowships, the lifetime learning credit, penalty-free withdrawals from IRAs, an above-the-line deduction for student interest, and Coverdell education savings accounts. See which breaks apply to your situation.