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Education Tax Incentives

February 26, 2021

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The IRS can help put some of the cost of medical school expenses back in your pocket. Qualifying taxpayers can benefit from tax credits and tax deductions. Three programs are highlighted below, and additional programs are detailed in IRS Publication 970. Choose the program that will benefit you the most.

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Student Loan Interest Deduction

This deduction allows qualified individuals to deduct up to $2,500 of interest paid on their student loans from their taxable income.

  • The amount of the deduction is phased out (gradually reduced) when your modified adjusted gross income (MAGI) reaches the annual limit for your filing status.
  • Qualified student loans must have been used for educational expenses and the student must have been enrolled at least half-time in a degree granting program.

For further details and qualifications, refer to the Student Loan Interest Deduction section of IRS Publication 970.

Tuition and Fees Deduction

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 repealed the tuition and fees deduction for tax years beginning after 2020. See IRS Form 8917 for more details. 

This deduction can be used to reduce taxable income, up to $4,000, when a student’s MAGI is $80,000 or less if filing single (or $160,000 or less if married filing jointly).

A Note About Deductions

Both the Student Loan Interest Deduction and the Tuition and Fees Deduction are taken as adjustments to income, which means you can claim the eligible deduction even if you do not itemize deductions when filing your federal income taxes.

Lifetime Learning Tax Credit

This credit allows you to reduce your tax bill on a dollar-for-dollar basis, up to $2,000 per return.

  • MAGI must be less than $69,000 if single (or $138,000 if married filing jointly).
  • This credit is available for all years of postsecondary education.
  • Credit is available for qualified expenses of tuition and fees required for enrollment.
  • To help determine your lifetime learning credit, a student should receive Form 1098-T from their eligible educational institution.

For further details and qualifications, refer to the Lifetime Learning Tax Credit section of IRS publication 970.

Use the Interactive Tax Assistant from the IRS to help you determine if you are eligible for an education deduction or credit.

What's the Difference Between a Tax Credit and a Tax Deduction?

A tax credit lowers your tax bill, dollar for dollar, while a deduction reduces your taxable income. Consider this example for an individual in the 28% tax bracket: A $1,000 tax credit will reduce the tax liability by the full $1,000; a $1,000 deduction will reduce the taxable income by that amount, effectively shaving $280 off the tax bill.

Tax Considerations for Loan Forgiveness

Medical students and residents considering Income Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Public Service Loan Forgiveness (PSLF) need to be aware of how tax filing status can impact a borrower’s required monthly repayment amounts as well as potential forgiveness implications that may exist.

  • Loan amounts forgiven at the end of IBR, PAYE, and REPAYE are currently taxable.
  • Loan amounts forgiven at the end of PSLF are not currently taxable.

No Double Benefit Allowed

The Lifetime Learning Tax Credit cannot be claimed in the same year as the Tuition and Fees Deduction.
This material is provided for general information only. Please see your tax advisor for information about other tax-related educational benefits and for information regarding your specific situation.

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