Tax Deductions for Tuition and Education Fees
The “Tuition and Fees Deduction” is an education tax benefit that allows taxpayers a tax deduction if they paid the qualified education expenses for an eligible student (themselves, their spouse, or a dependent). It is an above-the-line deduction that may reduce your taxable income by up to $4,000.
Credits lower your taxes. Tax credits provide a dollar-for-dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. On the other hand, deductions lower your taxable income and they are worth the percentage equal to your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).
A tax credit is always worth more than a dollar-equivalent tax deduction because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers a savings of $750 more than a $1,000 deduction.
You may claim the Tuition and Fees Tax Deduction if you meet all of the following requirements:
• You pay the qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is yourself, your spouse, or a dependent for whom you claim an exemption on your tax return
You cannot claim the Tuition and Fees Tax Deduction if any of the following applies:
• Your tax filing status is “married filing separately”
• Another person can claim you as a dependent in the Exemptions section of his/her tax return (note that you cannot take this deduction even if the other person does not actually claim you as their dependent)
• Your modified adjusted gross income (MAGI) exceeds $80,000 (or $160,000 if filing a joint tax return)
• You (or your spouse) were a nonresident alien for any part of the tax year and did not elect to be treated as a resident alien for tax purposes
• You (or anyone else) claims the American Opportunity Tax Credit, the Hope Scholarship Tax Credit, or the Lifetime Learning Tax Credit for qualified education expenses for the same student in the same year
The maximum amount you can claim for the Tuition and Fees Deduction in 2009 is $4,000 or $2,000, depending on your income level. If your MAGI is $65,000 or less ($130,000 if filing jointly), your maximum tax deduction is $4,000. If your MAGI is greater than $65,000 ($130,000 if filing jointly) but not more than $80,000 ($160,000 if filing jointly), your maximum tax deduction is $2,000. If your MAGI exceeds $80,000, you are not eligible this education tax benefit.
Qualified educational expenses include the following:
• Tuition and related expenses required for enrollment at an eligible educational institution
• Student-activity fees and course-related books, supplies, and equipment that are paid as a condition of attendance
Expenses that do not qualify for a Tuition and Fees Deduction include the following:
• Medical expenses (including student health fees)
• Room and board
• Similar personal, living, or family expenses
An eligible student is one who is enrolled at a qualified educational institution, who has either a high school diploma or GED (General Educational Development) credential.
Rules for Combining Education Tax Benefits
Note that there are specific rules regarding which education tax benefits may be used in the same tax year. Federal education tax deductions include the Tuition and Fees Deduction and the Student Loan Interest Deduction. Federal education tax credits include the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Hope Scholarship Tax Credit.
You cannot use the Tuition and Fees Deduction if you claimed a tax credit (American Opportunity, Lifetime Learning, or Hope) for education expenses for the same student in the same year.
However, the Tuition and Fees Deduction can be used in conjunction with some other education tax benefits, including tax-free distributions from Coverdell ESAs (Education Savings Accounts), qualified tuition programs, and education savings bonds. To take advantage of these education tax benefits simultaneously, different education expenses must form the basis for each separate benefit.