As students head back to their classrooms after the summer break, so do their teachers. If you have clients who are educators, then it’s time for a quick brush-up on tax benefits for the teaching profession.
Classroom expenses. 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 enhance their students’ 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. Most recently, the deduction expired for tax years beginning after 2014. However, the deduction was retroactively restored for 2015 and made permanent by the Protecting Americans From Tax Hikes (PATH) Act of 2015. In addition, the PATH Act expands the expenses eligible for the deduction and provides 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 will be 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 which 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, the IRS announced that there will be no inflation adjustment this year, so the deduction remains at $250 for 2016.
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 may now be eligible for the educators’ expensed deduction. Otherwise, the out-of-pocket cost for work-related education is an employee business expense that is included in miscellaneous itemized deductions. Miscellaneous deductions are deductible only to the extent that they exceed two percent of adjusted gross income.
However, 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 pursing 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 2016, the phase-out thresholds are $111,000 for joint return filers and $55,000 for other filers.
Note that, under a change made by the 2015 Trade Preferences Extension Act, no education credit (or tuition and fees deduction) will be allowed for 2016 or later years, unless a taxpayer receives a written payee statement from the educational institution.
Student loans. 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 2016, the student loan interest deduction is phased out for taxpayers with modified adjusted gross income between $130,000 and $160,000 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: Be sure to see our monthly recurring feature on tax and compliance deadlines, including the August article.