Tuition and Fees Tax Deduction

on April 11, 2017

Amount

$4,000 per taxpayer

Eligible Expenses

Tuition, Fees, Course Materials

Eligible Students

College must be eligible for

Title IV federal student aid

Number of Years

Unlimited

Expired at end of 2016 tax year

Income Phase-outs

$130,000 to $160,000 (MFJ)

$65,000 to $80,000 (S)

 




 

The Tuition and Fees Deduction is an above-the-line exclusion from income on federal income tax returns for up to $4,000 in qualified higher education expenses during the tax year.

 

Qualified higher education expenses include tuition, fees and course materials (textbooks, supplies and equipment). The expenses must be required by and paid to a college or university that is eligible for Title IV federal student aid. If the textbook costs are not paid to the college or university, they are not eligible for the Tuition and Fees Deduction.

 

Nonacademic fees (e.g., student activity fees and athletic fees) are not eligible. Amounts spent on living expenses (e.g., room and board, transportation, insurance and health care) are not eligible. Expenses for sports, games, hobbies and noncredit courses are not eligible unless part of the degree program. College admission application fees and admissions test fees are not eligible.

 

Since the Tuition and Fees Deduction is an above-the-line adjustment to income, it can be claimed even if the taxpayer does not itemize deductions.

 

The Tuition and Fees Deduction reduces the taxpayer’s adjusted gross income (AGI) and thus can yield other benefits in addition to the reduction in the taxpayer’s tax liability. For example, it can reduce the taxpayer’s state income tax liability in addition to reducing the thresholds for deducting medical expenses and unreimbursed employee business expenses.

 

Although the Tuition and Fees Deduction is available for an unlimited number of years, it expires periodically and is subsequently extended by Congress as part of the annual tax extenders legislation. The Tuition and Fees Deduction is currently available through the end of 2016. It is unclear whether it will be extended to 2017.

 

The Tuition and Fees Deduction is claimed per taxpayer, not per student, unlike the American Opportunity Tax Credit.

 

There are no enrollment status restrictions on eligible students. In particular, eligible students can be enrolled less than half-time, although they must be enrolled during at least one academic term that begins during the tax year. Eligible expenses that are incurred during the first three months of the next year may be counted as though they were paid in the current year.

 

Eligible students do not need to be seeking a degree, certificate or other recognized education credential.

 

Students are eligible even if they have a felony drug conviction, unlike the American Opportunity Tax Credit.

 

The income phase-outs are $130,000 to $160,000 for married taxpayers filing jointly and $65,000 to $80,000 for single filers. Married taxpayers who file separate income tax returns are not eligible. The Tuition and Fees Deduction is reduced to $2,000 within the phase-outs. The income phase-outs are not adjusted annually for inflation.

 

Eligible Taxpayers

 

In order to claim the Tuition and Fees Deduction, the taxpayer must not be claimable as a dependent on someone else’s federal income tax return. For example, if the student can be claimed as a dependent on his or her parents’ federal income tax return, the student is not eligible for the Tuition and Fees Deduction even if his or her parents opt to not claim the student as a dependent.

 

The taxpayer must list the student as an exemption on the taxpayer’s federal income tax return.

 

The Tuition and Fees Deduction can be claimed only for expenses paid by the taxpayer. Expenses paid by a dependent are not eligible.

 

Coordination Restrictions

 

Coordination restrictions prevent double-dipping. You cannot use the same expenses to justify both the Tuition and Fees Deduction and another education tax benefit, such as tax-free scholarships or a tax-free distribution from a 529 college savings plan. Thus, you cannot use a qualified distribution from a 529 plan to pay for the tuition and fee expenses that are used to claim the Tuition and Fees Deduction. Each must be based on different expenses. Instead, you should use cash or loans to pay for up to $4,000 in tuition and fee expenses to qualify for the maximum deduction.

 

However, unlike the coordination restrictions for other education tax benefits, the portion of a college savings plan distribution that represents a return of contributions may be used to pay for the eligible expenses that justify the Tuition and Fees Deduction. Likewise, the taxable portion of a scholarship or fellowship is not subject to the coordination restrictions.

 

But, a scholarship or fellowship is normally tax-free when used to pay for expenses that are eligible for the Tuition and Fees Deduction. So, unless the taxpayer elects to treat a tax-free scholarship or fellowship as taxable income, the scholarship or fellowship will not be available to pay for expenses eligible for the Tuition and Fees Deduction.

 

A taxpayer cannot claim the American Opportunity Tax Credit or the Lifetime Learning Tax Credit for the same student in the same year as the Tuition and Fees Deduction, even if different qualified expenses are available for each education tax benefit.

 

If a student is eligible for both the Tuition and Fees Deduction and the American Opportunity Tax Credit, the taxpayer should claim the American Opportunity Tax Credit for the student. The Tuition and Fees Deduction yields at most a $1,000 reduction in tax liability, while the maximum American Opportunity Tax Credit is $2,500. However, taxpayers will occasionally claim the Tuition and Fees Deduction because it reduces the taxpayer’s adjusted gross income (AGI).

 

When comparing the Tuition and Fees Deduction with the Lifetime Learning Tax Credit and other education tax benefits, it is best to calculate the financial benefit both ways. The Lifetime Learning Tax Credit yields a greater financial benefit only when eligible expenses exceed $5,000 or partway within the income phase-outs.

 

How to Claim the Tuition and Fees Deduction

 

The Tuition and Fees Deduction is claimed on the taxpayer’s federal income tax return. The taxpayer must file IRS Form 1040 to claim the Tuition and Fees Deduction.

 

Since IRS Form 1040 is required to claim the Tuition and Fees Deduction, it may preclude the taxpayer from qualifying for the simplified needs test and auto-zero EFC on the Free Application for Federal Student Aid (FAFSA).

 

Taxpayers must complete IRS Form 8917, Tuition and Fees Deduction, and attach it to their federal income tax return to claim the Tuition and Fees Deduction. Taxpayers should use IRS Form 1098-T, Tuition Statement, to complete IRS Form 8917. They should receive this form from the college by Jan. 31.

 

Additional Information

 

A good source of additional information is Chapter 6 of IRS Publication 970, Tax Benefits for Education. The statutory language appears in the Internal Revenue Code at 26 USC 222. The current regulations can be found at 26 CFR 1.6050S-1 and 26 CFR 1.6050S-2.

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