Deduction for Higher Education Tuition

If your income is too high to qualify for the Hope or Lifetime Learning tax credits, you still may be able to use this tax deduction to help with the high cost of a higher education. Depending on your income, you can deduct up to $4,000 of qualified expenses.

College tuition keeps rising and it’s getting harder to secure student loans.

Thankfully, the tax code offers some breaks to ease the financial pain of higher education expenses. The tuition deduction allows qualifying taxpayers to deduct $2,000 or $4,000 of qualifying tuition expenses. It helps subsidize post-high school education expenses you pay for yourself, your spouse or your dependents.

Before you use this deduction, however, check out the two tax credits available for college tuition. They have stricter income limits to qualify, but the credits are more valuable, reducing your taxes dollar-for-dollar compared with a tax deduction that merely reduces the amount of income subject to tax. Most people should claim the tuition deduction only if their income is too high to qualify for the Hope Credit or the Lifetime Learning Credit.

TurboTax Deluxe will calculate whether you qualify for a credit or a deduction, and how much you would save.

• This deduction is above the line, which means it reduces your Adjusted Gross Income (AGI). Officially known as an adjustment to income, you get to subtract above-the-line deductions to arrive at your AGI. That's important since reducing your AGI may preserve tax deductions and credits that otherwise might be reduced or eliminated at higher levels. For 2008, your itemized deductions begin to phase out if your AGI is $156,400 or higher ($78,200 if married filing separately). For 2009, the phase-out starts at $159,950 ($79,975.) An above-the-line deduction also means you get the benefit of this write-off even if you don't itemize deductions.
• The deduction isn't affected by the overall limitation on itemized deductions.
• To qualify for the tuition deduction, you can study whatever you want except sports, games and hobbies, and you can even study those if the classes are part of a degree program.

The deduction is available for qualifying expenses paid in 2008 and is based on:

• Enrollment for the year
• Enrollment for an academic term that begins during the year
• Enrollment that begins the first three months of the following year (in other words, if you paid tuition in December 2008 for a class that begins in January, February or March of 2009, the cost is included when figuring your 2008 deduction)

Whatever you pay in tuition or fees to enroll in or attend any accredited public or private institution above the high school level.

Basically, whatever you pay for most college and vocational classes should qualify.

You cannot take a deduction for the following:

• Room and board, insurance, medical expenses (including student health fees), transportation or other similar personal, living or family expenses
• Course-related books, supplies, equipment and nonacademic activities, except for fees required to be paid to the institution as a condition of enrollment or attendance
• Any course involving sports, games or hobbies, unless such course is part of the student's degree program

Also, once you figure out all of your qualified expenses, you must subtract any scholarships, educational assistance allowances or other nontaxable sources of income spent for educational purposes (other than gifts and inheritances). If your employer offers a tuition reimbursement plan as a fringe benefit that pays $1,000 of the cost of a $1,500 course you take, for example, only the remaining $500 would count for purposes of this deduction.

Qualified expenses you pay for yourself, your spouse or your dependents are eligible for the deduction.

Exceptions:

• If you can be claimed as a dependent on your parents' or someone else's tax return, you cannot claim the higher education deduction.
• If you are married and choose the married filing separately tax status, you cannot take this deduction.

For 2008 the top deduction is either $2,000 or $4,000 depending on your Adjusted Gross Income (AGI).

• If your Adjusted Gross Income is $65,000 or less ($130,000 or less with a joint return), your maximum deduction is $4,000
• If your Adjusted Gross Income is between $65,001 and $80,000 (between $130,001 and $160,000 with a joint return), your maximum deduction is $2,000
• If your Adjusted Gross Income exceeds these limits, you cannot take a deduction

Unlike many tax breaks that are gradually phased out as income rises above a threshold amount, this deduction is cut in half, then ends abruptly as AGI passes the set levels.

If you are a nonresident alien, you face an additional restriction: You must make a special election to be treated as a resident alien in order to take this new deduction. See IRS Publication 519: U.S. Tax Guide for Aliens.

You can't deduct or take a credit for the same expense twice.

If you can deduct these expenses under some other provision of the tax code, such as for employee or business expenses, you cannot claim the expenses for the higher education deduction. Also, if you use other tax-favored money to pay college expenses—such as tax-free interest from savings bonds or tax-free distributions of earnings from a qualified state tuition program (Section 529 Plan) or Coverdell Education Savings Account—the expenses covered by such funds do not count toward this deduction.

If you take the Hope Scholarship or Lifetime Learning Credits for a student, then you cannot claim the higher education deduction for that student in the same year, even if the student used other funds to pay for those expenses.

TurboTax Deluxe will ensure that you take either a credit or the deduction that you deserve.

For a general overview, see IRS Publication 970: Tax Benefits for Education. For more information on deducting higher education expenses, see IRS Topic 457: Tuition and Fees Deduction.

Updated for tax year 2008