What Is It?
There is a federal income tax deduction for tax years 2004 through 2020 for certain taxpayers who pay qualified higher education expenses. The definition of "qualified higher education expenses" includes the tuition and fees you've paid for enrollment in a degree or certificate program at an accredited post-secondary educational institution. Since this law is intended primarily as a college tuition tax break, you can't include any charges associated with meals, lodging, insurance, transportation, or other living expenses.
Only your qualified out-of-pocket expenses can be deducted. In other words, you can't include scholarships, fellowship grants, or other forms of tax-free educational benefits.
Caution: Unless new legislation is passed extending its availability, you cannot claim the deduction for qualified higher education expenses for tax years after 2020.
You may be able to deduct at least part of the qualified higher education expenses you paid during the tax year. Several requirements apply. For tax years 2004 through 2020, you may be able to deduct up to $4,000 of qualified higher education expenses if your AGI doesn't exceed $65,000 ($130,000 if you're married and file jointly). If your AGI exceeds that limit but doesn't exceed $80,000 ($160,000 if you're married and file jointly), you may be eligible to claim up to $2,000 of qualified higher education expenses.
If you're a parent, you may qualify to claim the deduction if you meet the above income limits, have paid qualified education expenses for your dependent child during the tax year, and have reported your child's name and taxpayer identification number on your tax return. However, you can't claim the deduction if you're married and file a separate return or can be claimed as a dependent on someone else's return.
Example(s): Assume your dependent child entered an accredited private college in September of 2019. At that time, you prepaid the $8,000 first semester tuition, $5,000 of which was earmarked for tuition and fees, and the rest was to go toward meals and lodging. For 2019, you and your spouse file a joint federal income tax return, report an AGI of $95,000 (before the deduction), and claim no education tax credits. You should be able to claim a $4,000 qualified higher education deduction on your 2019 tax return.
Caution: This deduction is unavailable for tax years 2021 and thereafter.
Caution: Special rules apply to nonresident aliens. For more information, consult a tax professional.
Coordination with the American Opportunity (Hope) Credit and the Lifetime Learning Credit
You can't take the tuition deduction for a given tax year if you claim an American Opportunity tax credit or a Lifetime Learning credit for the same student that year. So which is better, the deduction or a credit?
That depends on your circumstances. The deduction for qualified higher education expenses is an above-the-line deduction. This means that it reduces your AGI and can be claimed regardless of whether you itemize deductions on your tax return. But in general, a tax credit is more beneficial than an above-the-line deduction of an equal amount. That's because a tax credit is a dollar-for-dollar reduction against taxes owed, while a deduction provides only a partial offset. A deduction simply reduces the income on which your tax is based.
If you don't qualify for the American Opportunity tax credit or the Lifetime Learning credit because, for example, your AGI is too high, you may benefit from the deduction for qualified higher education expenses. The American Opportunity tax credit begins to phase out for singles with adjusted gross incomes above $80,000 and for married couples with incomes above $160,000. The Lifetime Learning credit begins to phase out for singles with adjusted gross incomes above $59,000 (in 2020, $58,000 in 2019) and for married couples with incomes above $118,000 (in 2020, $116,000 in 2019).
The American Opportunity tax credit is generally worth up to $2,500 per student for qualified higher education expenses paid during the first four years of post-secondary education. The Lifetime Learning credit also involves course work in post-secondary institutions, but it includes graduate- and professional-level courses. It's not limited to the first four years of school and does not require enrollment in a degree or certificate program. It's generally worth up to $2,000, which may or may not provide you with a greater tax benefit than the deduction. Keep in mind that you can't claim both credits (the American Opportunity tax credit and the Lifetime Learning credit) for the same student in the same year.
The bottom line is that you should figure your taxes both ways (the deduction versus a credit), and use the method that provides you with the greatest overall tax benefit.
Tip: For tax years beginning after 2008, the Hope credit is renamed the American Opportunity Tax Credit. The full credit is available to those making less than $80,000 ($160,000 for joint filers). Those making between those amounts and $90,000 ($180,000 for joint filers) will get a partial credit. The credit will also be partially refundable.
When Calculating Your Deduction, Certain Items Are Excluded
You can't use the deduction for qualified higher education expenses to claim a double tax benefit. If an educational expense is deductible elsewhere on your tax return, it can't be deducted again. So, when calculating the amount of your deduction for qualified higher education expenses, you must subtract certain items (if applicable). Specifically, you must reduce your deduction by amounts excluded for:
- Distributions from a qualified tuition plan (Section 529 plan), other than a return of contributions to the plan
- Distributions from a Coverdell education savings account (formerly known as an education IRA)
- Interest on U.S. savings bonds used to pay for higher education
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