As students head back to their classrooms after the summer break, so do their teachers. It’s time for a quick brush-up course on tax benefits for your clients who are in the teaching profession.
In a perfect world, schools would supply everything a teacher needs to educate his or her students. In reality, many teachers dig into their own pockets to pay for basic supplies or for materials to ensure their students have a good educational experience.
An “eligible educator” can claim an above-the-line deduction for out-of-pocket teaching-related expenses. Until recently, this educators’ expense deduction was a temporary provision. The deduction was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015, which also expanded the expenses eligible for the deduction and provided for indexing of the limit on deductible expenses.
An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal or aide who works in a school for at least 900 hours during a school year. A school is defined as any elementary education or secondary education (kindergarten through grade 12), as determined under state law.
Deductible expenses include outlays for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services), and other equipment or supplementary materials used by an eligible educator in the classroom. In addition, under a change made by the PATH Act for 2016 and later years, the deduction is allowed for expenses paid by an eligible educator for professional development courses related to the curriculum in which the educator provides instruction, or to the students for whom the educator provides instruction.
Since its inception, the educators’ expense deduction has been capped at $250 per year. The PATH Act provides for indexing of the deduction limit for tax years beginning after 2015. However, there have been no inflation adjustments to date, so the deduction remains at $250 for 2018.
Many teachers and other education professionals regularly take continuing education (CE) courses to enhance their skills. Reimbursements for work-related CE are excludable from income. And, as noted above, a limited amount of expenses for professional development may now be eligible for the educators’ expensed deduction.
Tax law change: In prior years, unreimbursed employee business expenses, including the costs of continuing education, were deductible as miscellaneous itemized deductions (subject to a 2%-of-adjusted-gross-income deduction floor). However, the Tax Cuts and Jobs Act of 2017 eliminates all miscellaneous itemized deductions—including deductions for employee business expenses—for tax years beginning after 2017 and before 2026.
Nonetheless, there is another option. An educator may be able to claim a Lifetime Learning credit for his or her CE costs. An eligible student can claim the Lifetime Learning credit for 20 percent of up to $10,000 of qualified post-secondary education expenses paid during a tax year. Thus, the maximum tax credit is $2,000 per year.
An educator is an eligible student if he or she is enrolled in one or more courses at an eligible educational institution. The educator doesn’t need to be pursuing a degree or enrolled for any minimum number of credits or courses. Eligible education includes undergraduate, graduate or professional degree courses, as well as any course of instruction to acquire or improve job skills. The Lifetime Learning credit can be claimed for any number of years in which an educator incurs eligible education expenses.
The credit is, however, phased out if modified adjusted gross income exceeds a threshold amount. For 2018, the phase-out thresholds are $114,000 for joint return filers and $57,000 for other filers.
Note that no education credit will be allowed for 2016 or later years unless a taxpayer receives a written payee statement (Form 1098-T) from the educational institution
Many educators, especially early-career members of the profession, may still be paying for their own educations. The student loan interest deduction allows taxpayers to claim an above-the line write-off for up to $2,500 of interest paid during the year on a qualified higher education loan. A qualified loan is a debt that was incurred solely to pay for qualified higher education expenses, including tuition, fees, room and board, and related expenses.
For 2018, the student loan interest deduction is phased out for taxpayers with modified adjusted gross income between $135,000 and $165,000 on a joint return, or $65,000 to $80,000 on a single or head-of-household return. The deduction cannot be claimed by married individuals filing separately.
Editor’s note: This article was originally published on Aug. 8, 2016, and was updated on Aug. 10, 2018.