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Tax lessons for teachers

Tax Law and News Section 529 plans

As students head back to their classrooms—whether virtually or in person—so do their teachers. Consequently, it’s a good time for a quick brush-up course on tax benefits for the teaching profession.

Classroom expenses. In a perfect world, schools would supply everything a teacher needs to educate their students. In reality, many teachers dig into their own pockets to pay for basic supplies or for materials to enhance their students’ educational experience.

An “eligible educator” can claim an above-the-line deduction for out-of-pocket teaching-related 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 means any school that provides elementary education or secondary education (kindergarten through grade 12), as determined under state law.

Traditionally 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, the deduction is allowed for expenses paid by an eligible educator for professional development courses related to the curriculum for which the educator provides instruction or to the students for whom the educator provides instruction.

COVID-19 alert: In response to COVID-19, the COVID-19 Tax Relief Act (which was enacted as part of the Consolidated Appropriations Act, 2021, PL 116-20) directed the IRS to expand the list of deductible expenses to include personal protective equipment, disinfectant, and other supplies used for the prevention of COVID-19 in the classroom. In response, an IRS Revenue Procedure provides that an eligible educator can claim a deduction for unreimbursed expenses paid or incurred after March 12, 2020, for COVID-19 protective items. Eligible items include, but are not limited to, face masks; disinfectant; hand soap; hand sanitizer; tape, paint, or chalk to guide social distancing; physical barriers such as plexiglass; air purifiers; and other items recommended by the Centers for Disease Control (CDC) [Rev. Proc. 2021-15].

The educators’ expense deduction is capped at $250 per year per eligible educator indexed for tax years beginning after 2015. However, there have been no inflation adjustments to date, so the deduction remains at $250 for 2021.

Continuing education. 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 are eligible for the educators’ expense deduction.

In the past, unreimbursed employee business expenses, including the costs of CE, were deductible as miscellaneous itemized deductions (subject to a 2%-of-adjusted- gross-income deduction floor). However, the Tax Cuts and Jobs Act eliminated 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 their CE costs. An eligible student can claim the Lifetime Learning credit for 20% 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 they are enrolled in one or more courses at an eligible educational institution. The educator need not 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 phased out if modified AGI exceeds a threshold amount. However, educators who were phased out of the credit in prior years may be able to cash in for 2021. Starting in 2021, the Taxpayer Certainty and Disaster Relief Act of 2020 (part of the Consolidated Appropriations Act, 2021, PL 116-260) increased the phaseout thresholds to $80,000 for single filers and $160,000 for joint filers indexed after 2021 (up from $59,000 and $119,000 for 2021 under prior law). Note that no education credit is allowed unless a taxpayer receives a written payee statement (Form 1098-T, Tuition Statement) from the educational institution.

Student loans. Many educators, especially younger members of the profession, are still paying for their own education. The student loan interest deduction allows taxpayers to claim an above-the-line writeoff 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 2021, the $2,500 maximum student loan interest deduction is phased out for taxpayers with modified AGI between $140,000 and $170,000 on a joint return, or $70,000 to $85,000 on a single or head-of-household return. The deduction cannot be claimed by married individuals filing separately.

COVID-19 alert: In response to COVID-19, the Department of Education initially announced deferment of payments and a waiver of interest on federal student loans for the period beginning March 2020 through Jan. 31, 2021.

The deferment was subsequently extended until Sept. 30, 2021. In addition, legislation enacted in response to the pandemic created a tax break for employer-provided student loan repayments. Employer payments—whether paid to the employee or directly to the lender—qualify as educational assistance that can be excluded from an employee’s income. The exclusion for employer-provided educational assistance is limited to $5,250 per employee each year. The exclusion initially applied only to loan repayments made after March 27, 2020, and before Jan. 1, 2021, but was extended for loan repayments made through 2025 [IRC §127(c)(1)(B)].

Editor’s note: This article was originally published on Aug. 8, 2016, updated on Aug. 10, 2018, and updated again on Aug. 4, 2021.