New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

2020 Tax Brackets, Standard Deduction, and Other Changes

Last week the IRS published the annual inflation updates for 2020. As was the case for 2019, it’s really just regular inflation adjustments, as opposed to the major legislative changes we had two years ago (i.e., effective for 2018).

If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements: Rev. Proc. 2019-44 (which contains most inflation adjustment figures) and Notice 2019-59 (for figures relating to retirement accounts).

Single 2020 Tax Brackets

Taxable Income
Tax Bracket:
$0-$9,875 10%
$9,875-$40,125 12%
$40,125-$85,525 22%
$85,525-$163,300 24%
$163,300-$207,350 32%
$207,350-$518,400 35%
$518,400+ 37%

 

Married Filing Jointly 2020 Tax Brackets

Taxable Income
Tax Bracket:
$0-$19,750 10%
$19,750-$80,250 12%
$80,250-$171,050 22%
$171,050-$326,600 24%
$326,600-$414,700 32%
$414,700-$622,050 35%
$622,050+ 37%

 

Head of Household 2020 Tax Brackets

Taxable Income
Tax Bracket:
$0-$14,100 10%
$14,100-$53,700 12%
$53,700-$85,500 22%
$85,500-$163,300 24%
$163,300-$207,350 32%
$207,350-$518,400 35%
$518,400+ 37%

 

Married Filing Separately 2020 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$9,875 10%
$9,875-$40,125 12%
$40,125-$85,525 22%
$85,525-$163,300 24%
$163,300-$207,350 32%
$207,350-$311,025 35%
$311,025+ 37%

 

Standard Deduction Amounts

The 2020 standard deduction amounts are as follows:

  • Single or married filing separately: $12,400
  • Married filing jointly: $24,800
  • Head of household: $18,650

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts is unchanged at $6,000.

The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans has increased to $19,500.

The catch-up contribution limit for 401(k) and other similar plans for people age 50 and over has increased to $6,500.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $57,000.

Child Tax Credit

The child tax credit ($2,000 per child) and the related phaseout threshold ($200,000 of modified adjusted gross income, $400,000 if married filing jointly) do not get inflation adjustments. The portion of the credit that can be refundable (up to $1,400 per child) does receive inflation adjustments, but it is still $1,400 for 2020.

Capital Gains and Qualified Dividends

For 2020, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $80,000 of taxable income if married filing jointly, $53,600 if head of household, or $40,000 if filing as single or married filing separately.
  • 15% tax rate if they fall above the 0% threshold but below $496,600 if married filing jointly, $469,050 if head of household, $441,450 if single, or $248,300 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $72,900 for single people and people filing as head of household,
  • $113,400 for married people filing jointly, and
  • $56,700 for married people filing separately.

Estate Tax

The estate tax exclusion is increased to $11,580,000 per decedent.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2020, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $326,600 for married taxpayers filing jointly and $163,300 for single taxpayers, people filing as head of household, or married people filing separately.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

What To Do If You Don’t Have to File a Tax Return (Tell the IRS?)

A reader writes in, asking:

“As a family courtesy, I recently began completing/filing taxes for two sets of elderly relatives with very small incomes (Social Security, pensions, IRAs).  In reviewing their past years returns, I found they have not had to pay taxes for several years, with their total incomes significantly below the thresholds established by the IRS and state.  Barring a winning lottery ticket, year after year, they owe no taxes, plain and simple.  My understanding from reading the tax code is that they can stop filing altogether, but this idea makes them nervous and even I – after a lifetime of filing taxes – find it contrary to my ‘conditioned response.’  While the codes on ‘Who Must File’ are clear, should we send a one-time letter to the IRS informing them of our intent to stop filing?”

If a person does not need to file, there’s no need to send the IRS any letter indicating such. They can simply not file, and if the IRS later contacts them about the lack of a return, they can reply with a letter indicating the reason (i.e., gross income below applicable threshold and did not meet any of the other “must file” reasons). And, if the person wanted to do so, they could include in that letter a statement indicating that, barring unforeseen circumstances, they will continue to be below the applicable threshold going forward.

I would be cautious about getting into a “not filing” habit though. Circumstances can change in the future. And that applies not just to personal circumstances but also tax law-related circumstances. That is, the rules may change in the future — potentially lowering the “must file” threshold*, potentially adding a new type of tax that the person would have to pay even with a low income, or potentially adding a new refundable credit which the person could claim if they filed. In other words, I would make a point of conscientiously checking every year whether there are any circumstances that would either require filing or make filing beneficial.

As a separate point, even when filing isn’t required, tax returns (even if simply prepared and not actually filed) can often serve as a useful overall record of the person’s finances. A lack of records has a tendency to make things harder at various times down the road — whether for the person in question, heirs, or executors.

*In fact, as the law is written right now, the “must file” threshold will go down significantly in 2026 once the temporary increase in the standard deduction expires.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Repaying the Advance Premium Tax Credit (Form 8962) as a Dependent

A reader writes in, asking:

“I have a question regarding Form 8962 (Premium Tax Credit). I am a dependent, received Advance Premium Tax Credit, and have to file 8962 since nobody will actually be claiming me as a dependent. Last year it was simple because publication 974 provided clear instructions for my situation. There was a section that provided instructions for people claiming no personal exemptions, as would be the case for somebody who is a dependent.

This year those instructions are absent since nobody can claim personal exemptions. I’m confused about how to proceed, especially regarding lines 1-5.”

Firstly just to make sure we’re clear on this point: people still can claim dependents, even though the exemption amount is currently set to zero. (Dependents might be claimed for the child tax credit, American Opportunity Credit, or for other assorted purposes.)

If you are claimed as somebody’s dependent, then you are not eligible for the premium tax credit, and you do not file Form 8962. Rather, it is the person who claims you as a dependent who would file Form 8962 for the purpose of calculating any premium tax credit and, if necessary, repaying any excess advance premium tax credit.

If you are confident that nobody is claiming you as a dependent for the year, but you could be claimed as somebody’s dependent for the year, then you would fill out Form 8962 to indicate that you were not eligible for the premium tax credit (because you can be claimed as somebody’s dependent). That is, you would enter zero as your family size (assuming you are not married). And the household income (i.e., MAGI of the people in the household) is zero, because the family size in question is zero. And because the premium tax credit is not allowed to anybody who could be claimed as a dependent, the premium tax credit (line 24) is zero. And then lines 27, and 29 would ultimately reflect the fact that any advance premium tax credit is excess advance premium tax credit.

Now, those are the rules, and that is how I would personally fill out the return in such a situation. But I’m sure I will receive several emails pointing out the following if I do not mention it: some people would encourage you to not check the “I can be claimed as somebody’s dependent” box if nobody else is actually claiming you as a dependent — because if nobody claims you as a dependent, it would be hard for the IRS to be aware of the fact that somebody could claim you as a dependent. And if you are not somebody else’s dependent, then you could be eligible for the premium tax credit.

But again, the Code sections in question (36B, 151, 152) are very clear on this point: if you could be claimed as a dependent, you are not eligible for the premium tax credit. And I would suggest filing accordingly.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

How Do I Calculate My Income Tax Refund?

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Many taxpayers in the U.S. have come to expect a sizable refund check every tax season. To some people who don’t prepare their own tax returns, it’s a mystery how the refund is calculated.

The idea is really quite simple. After calculating your taxable income, you use the information in the tax tables to determine your total income tax for the year. This amount is then compared to the amount that you actually paid throughout the year (in the form of withholdings from your paychecks). If the amount you paid is more than your tax, you are entitled to a refund for the difference. If the amount you paid is less than your tax, it’s time to get out the checkbook.

Withholding: Why It’s Done

If you work as an employee, you’re certainly aware that a large portion of your wages/salary doesn’t actually show up in your paycheck every two weeks. Instead, it gets “withheld.”

The reason for this withholding is that the federal government wants to be absolutely sure that its gets its money. The government knows that many people have a tendency to spend literally all of the income they receive (if not more). As a result, the government set up the system so that it would get its share before taxpayers would have a chance to spend it.

The amount of your pay that gets withheld is based upon an estimate of how much tax you’ll be responsible for paying over the course of the year. (This is why you are required to fill out Form W-4, providing your employer with some tax-related information, when you start a new job.)

Withholding: How It’s Calculated

At this point you may be thinking, “OK. Well I just learned that I’m in the __% tax bracket, and it’s obvious that my employer is withholding way more than that!”

You’re probably right. That’s because your employer isn’t just withholding for federal income tax. They’re also withholding for Social Security tax, Medicare tax, and (likely) state income tax.

The Social Security tax is calculated as 6.2% of your earnings, and the Medicare tax is calculated as 1.45% of your earnings. Before you’ve even begun to pay your income taxes, 7.65% of your income has been withheld.

Your refund is determined by comparing your total income tax to the amount that was withheld for federal income tax. Assuming that the amount withheld for federal income tax was greater than your income tax for the year, you will receive a refund for the difference.

EXAMPLE: Nick’s total taxable income (after subtracting deductions) is $32,000. He is single. Using the tax table for single taxpayers, we can determine that his federal income tax is $3,646.

Over the course of the year, Nick’s employer withheld a total of $8,500 from his pay, of which $4,000 went toward federal income tax. His refund will be $354 (i.e., $4,000 minus $3,646).

Simple Summary

  • Every year, your refund is calculated as the amount withheld for federal income tax, minus your total federal income tax for the year.
  • A large portion of the money being withheld from each of your paychecks does not actually go toward federal income tax. Instead, it goes to pay the Social Security tax, the Medicare tax, and possibly state income tax.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Tax-Loss Harvesting

One useful thing you can do with your portfolio during market declines is check your taxable accounts for opportunities to tax-loss harvest. (Note: tax-loss harvesting does not apply to IRAs or other tax-sheltered accounts.)

To explain what tax-loss harvesting is, let’s look at an example.

Mary is in the 24% tax bracket. At the beginning of the year, Mary bought $100,000 of Vanguard Total International Stock Index Fund in her taxable account. And let’s imagine that as of today, it’s worth approximately $93,000. To tax-loss harvest, Mary would sell that fund, thereby recognizing a $7,000 capital loss. And Mary would use the proceeds from the sale to purchase another fund to serve as a replacement in her portfolio.

Mary can use the $7,000 capital loss to offset any capital gains she realized this year. And if Mary’s capital losses exceed her capital gains for the year, she can use up to $3,000 of her net capital loss to offset ordinary income, thereby reducing her income tax by $720 (i.e., $3,000 x 24%). If she still has remaining capital losses after that, they can be carried forward to be used in future years (subject to the same limitation).

What’s the Point?

You may have noticed, however, that when you eventually sell the replacement fund, your capital gain will be larger than it would have been had you not tax-loss harvested (because the replacement fund will have been purchased at a lower price than the original fund).

To return to our example above, if Mary uses her $93,000 to purchase Vanguard FTSE All-World Ex-US Index, which she sells a few years later for $130,000, her long-term capital gain will be $37,000 rather than $30,000.

So did Mary still come out ahead? Yes, for a few reasons.

First, if nothing else, she deferred her taxes for a few years — in essence getting an interest-free loan from Uncle Sam.

Second, if she was able to use any of her $7,000 capital loss to offset ordinary income (or short-term capital gains), then the capital loss saved her money at a rate of 24% (because she’s in the 24% tax bracket). When she sells the replacement fund, the long-term capital gain will be taxed at a lower rate (likely 15%).

Finally, if Mary had ended up dying before she sold the fund, the savings from tax-loss harvesting would be pure profit (because her heirs will receive the fund’s current market value as their cost basis when they inherit it).

When to Tax-Loss Harvest

Many investors check for tax-loss harvesting opportunities right before the end of the year — when they start thinking about taxes. While that’s perfectly fine, it can be advantageous to check several times throughout the year. Investments can be volatile, and it’s entirely possible that a tax-loss harvesting opportunity will arise early in the year, only to disappear before year-end.

Potential Pitfall: The Wash Sale Rule

The place where people often trip up is by accidentally triggering the “wash sale” rule. A wash sale occurs when you:

  1. Sell an investment for a loss, and
  2. Buy “substantially identical” securities within 30 days before or after the sale.

When a wash sale occurs, the loss is disallowed. Fortunately, the cost basis of your new shares is adjusted upward by an amount equal to the disallowed loss so that when you sell the shares in the future — assuming you don’t trigger the wash sale rule yet again — you’ll be able to claim the loss (or, depending on circumstances, a smaller capital gain).

Example: Catherine buys 100 shares of a stock at $38 per share. A few months later, Catherine sells the shares for $25 per share. Five days later, she buys another 100 shares of the same stock at $29 per share. Because she bought new shares within 30 days of the sale, the wash sale rule will be triggered, and Catherine’s loss of $13 per share will be disallowed. Her cost basis in the new shares, however, will be $42 per share ($29 purchase price + $13 from the disallowed loss), thereby allowing for a larger capital loss or smaller capital gain when she sells the shares in the future.

Wash Sales Due to a Spouse’s Transactions

Some investors hope to avoid the wash sale rule by having their spouse buy a particular investment at the same time that they sell it for a loss. But, as explained in IRS Publication 550this does not work. For the purpose of triggering a wash sale, your spouse buying or selling an investment has the same effect as you buying or selling the investment.

Wash Sales Due to Buying in an IRA

Other investors try to avoid a wash sale by selling an investment for a loss in their taxable account, then buying the same investment in their IRA — with the idea being that the IRA is titled differently than the taxable account, so it would not trigger a wash sale.

This doesn’t work either. Buying a “substantially identical” investment in your IRA (whether Roth or traditional) within 30 days of the sale will result in a wash sale.

Wash Sales Due to Buying Within 30 Days Prior to Sale

Finally, many investors think of wash sales as only occurring if you re-buy the investment shortly after selling it. That is, they forget that a wash sale can occur if you buy shares within 30 days prior to the sale.

Example: On January 1, Josh buys 100 shares of Vanguard Total Stock Market ETF in his brokerage account for $60 per share. On January 15, Josh buys another 100 shares for $58 per share. On January 20, Josh sells 100 shares, at a price of $56 per share. Josh has a wash sale. His loss will be disallowed and added to the cost basis of his remaining 100 shares.

Note, however, that you do not need to worry about wash sales if you liquidate all of your shares of a given investment and you do not repurchase substantially identical securities within 30 days.

Example: On January 1, Lucy buys 100 shares of Vanguard Total Stock Market ETF in her brokerage account, at a price of $60 per share. On January 10, Lucy sells her 100 shares for $55 per share, and she does not purchase substantially identical securities in any of her accounts within the next 30 days. Lucy will be able to claim her loss of $5 per share, despite the fact that a purchase occurred within 30 days prior to the sale.

Wash Sales from Buying in a 401(k)

Update: A few readers asked whether a wash sale can be triggered when, after selling an investment for a loss in a taxable account, substantially identical securities are purchased in a 401(k) or 403(b).

This answer is a bit trickier. Section 1091 of the Internal Revenue Code is the law that creates the wash sale rule. It doesn’t mention retirement accounts at all. The rule about wash sales being triggered from purchases in an IRA comes from IRS Revenue Ruling 2008-5. If you read through the ruling, you’ll see that it speaks specifically to IRAs and does not mention 401(k) or other employer-sponsored retirement plans.

To the best of my knowledge, there is no official IRS ruling that speaks specifically to wash sales being created by a transaction in a 401(k). In other words, I’m not aware of any source of legal authority that clearly says that a purchase in a 401(k) would trigger a wash sale.

However, in my opinion, it seems pretty clear that the line of reasoning in the above-linked revenue ruling would apply to employer-sponsored retirement plans as well as IRAs.

So, personally, I would not be comfortable taking a position on a tax return that’s based on the assumption that purchases in a 401(k) cannot trigger a wash sale. But that’s just my personal opinion. Others may disagree.

What Makes Two Mutual Funds “Substantially Identical”?

Update #2: Several readers also wrote in with questions about how to know whether two mutual funds are “substantially identical” for the purposes of triggering a wash sale.

Unfortunately, I’m not aware of any official IRS position providing a cut-and-dried test to determine whether two mutual funds are substantially identical. From what I gather, challenging people on the wash sale rule is just not a top priority from a tax enforcement standpoint.

Personally, my standard is this: If the IRS did challenge my position, and I ended up in court having to make the case that these two funds were not substantially identical, would I feel confident about my chance of success? Unless the answer is “yes, absolutely,” I’d choose a different (less similar) mutual fund.

For example, I would not be comfortable making the case that the following are not substantially identical:

  • The ETF version and the mutual fund version of a given Vanguard index fund,
  • Two index funds or ETFs that track the same index (even if their holdings are not identical), or
  • Two “total market” index funds, even if they track slightly different indexes.

In short, I would probably not want to use a given fund as a tax loss harvesting partner for another fund unless I could not only show that the underlying portfolios are different, but also provide a chart showing that the two funds really do perform noticeably differently. But, as with the previous question, this is one in which other people could rationally reach a different conclusion.

Finally, as author Taylor Larimore often reminds investors at the Bogleheads forum: If you want to tax loss harvest with a particular fund, and you don’t want to worry about finding a replacement fund that’s similar but not substantially identical, you can always just wait 31 days after the sale, then re-buy the original fund.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Tax Deduction and Credits for College Expenses

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Given that the tax law is (usually) set up to reward things that Congress has decided are beneficial to our country, it’s no surprise that there are tax breaks available to people paying for higher education expenses.

Education Credits

If you pay higher education expenses for yourself, your spouse, or your dependent, you may be entitled to one (or both) of two credits: the Lifetime Learning Credit or the American Opportunity Credit.

Lifetime Learning Credit

The Lifetime Learning Credit may be available to you if you pay postsecondary education expenses for a student. The credit is calculated as 20% of the first $10,000 of qualified education expenses that you pay in a given year. (Note that this means that the maximum credit per tax return is $2,000.)

Your eligibility to claim the Lifetime Learning Credit begins to decrease as your modified adjusted gross income exceeds $58,000 for 2019 ($116,000 if married filing jointly). Once your MAGI reaches $68,000 ($136,000 if married filing jointly), you’ll no longer be eligible to use the credit.

There is no limit to the number of years that the Lifetime Learning Credit can be used for a given student.

In order to qualify for the Lifetime Learning Credit, the expenses must be paid to a university, college, vocational school, or other postsecondary educational institution. Eligible expenses include tuition, fees, and other course-related expenses that are required to be paid to the institution as a condition for enrollment or attendance. The course must be part of a postsecondary degree program or taken by the student to acquire or improve job skills.

EXAMPLE: Jack is attending school to be a filmmaker. In addition to his tuition, he’s required to pay $500 per semester for use of the school’s film studio. Because he is required to pay the $500 to the school in order to attend classes, the expense can be included as a qualifying education expense.

EXAMPLE: Lee is attending school for a degree in Spanish. Each semester, he is required to buy several textbooks and DVDs to use for his courses. However, because his school doesn’t require him to buy the materials from the school — he could buy them online on Amazon, for instance — the cost does not count as a qualifying education expense.

Two more points of note about qualifying expenses:

  1. Room and board does not count as a qualifying education expense.
  2. It doesn’t matter whether or not the money used to pay the expenses was obtained with a loan.

American Opportunity Credit

The American Opportunity Credit is available for students who are in their first four years of postsecondary education and who are enrolled at least “half-time.” The amount of the credit is the sum of the first $2,000 of qualified education expenses paid for the student, plus 25% of the next $2,000 of qualified expenses. (Note that this means that the maximum credit per student is $2,500.)

Your eligibility to claim the American Opportunity Credit begins to decrease as your modified adjusted gross income exceeds $80,000 ($160,000 if married filing jointly). Once your MAGI reaches $90,000 ($180,000 if married filing jointly), you’ll no longer be eligible to use the credit.

In addition to the expenses that can be used when calculating the Lifetime Learning Credit, expenditures for “course materials” can be used for purposes of calculating the American Opportunity Credit. “Course materials” includes books and supplies needed for a course, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.

How the Credits Work Together

For a given student, you can claim either the Lifetime Learning Credit or the American Opportunity Credit in a given year, not both.

EXAMPLE: Katie and Alex are siblings. Alex is a freshman in college, and Katie is a senior (in her fifth year of college). With the help of some student loans, their family spends $20,000 for tuition for each of them for the year.

The family should probably claim the American Opportunity Credit for Alex, because it will allow for a credit of $2,500, as opposed to the $2,000 that would be allowed via the Lifetime Learning Credit. Also, by not using the Lifetime Learning Credit for Alex, the family can still use the Lifetime Learning Credit for Katie. (Katie is ineligible for the American Opportunity Credit, because she is in her fifth year of college.) In total, the family will be able to claim $4,500 of education-related credits.

Student Loan Interest Deduction

If you pay interest on student loans, you may be able to deduct that interest (up to $2,500 per year) as an “adjustment to income” (sometimes referred to as an “above the line” deduction). In order to qualify:

  1. The loan must be taken out solely to pay for qualified higher education expenses,
  2. You (and your spouse, if you’re married) must not be claimed as a dependent on another person’s return, and
  3. If married, you must file jointly.

The $2,500 limit for the deduction is reduced as your modified adjusted gross income exceeds (for 2019) $70,000 ($140,000 if married filing jointly). Once your modified adjusted gross income reaches $85,000 ($170,000 if married filing jointly), you will no longer be eligible for the deduction.

Simple Summary

  • If you pay postsecondary education expenses for yourself, your spouse, or your dependent, you may be eligible for the Lifetime Learning Credit (of up to $2,000). Only one Lifetime Learning Credit can be claimed per tax return per year.
  • If you pay higher education expenses for yourself, your spouse, or your dependent, you may be eligible to claim the American Opportunity Credit (of up to $2,500 per student).
  • For a given student’s expenses each year, you can use either the American Opportunity Credit or the Lifetime Learning Credit, not both.
  • If you pay student loan interest, you may qualify for a deduction for the amount of interest paid, up to $2,500.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2019 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator: Open Social Security