Tuition And Fees Deduction: When To Use This Tax Relief?

The tuition and fees deduction can reduce your income subject to tax by up to $4,000. This is considered as an adjustment to your gross income. The qualified expenses must be paid for a higher education. Generally, the education tax credit provides a higher refund than the tuition and fees deduction. However, there are some instances that you may not qualify for the education credits because your adjusted gross income or (AGI) is over the limit. You usually choose the tax deduction or credit that will yield a higher tax benefit.

When to Use this Tax Relief

So you normally use this education tax deduction if you do not qualify to any of the education tax credits available. In addition, you use this if you think it would lower your Adjustment Gross Income or AGI in order to be just below the threshold of some of the benefits. Generally, you will use this tax deduction if it would give you the most overall tax benefit.

To claim the credit, you must pass the following tests:

  • Post-Secondary Education – You paid expenses for all post-secondary education.
  • Eligible Student – You paid expenses for an eligible student such as yourself, spouse, or a dependent that you can claim an exemption.
  • Filing Status Test – Your filing status must not be “married filing separate.”
  • Dependency Test – You are not listed as a dependent on another person’s tax return.
  • MAGI Test – Your modified adjusted gross income (MAGI) for the tax year 2009 is less than $80,000 for single taxpayers (or less than $160,000 for joint filers)
  • Residency Test – You (or your spouse) were not a nonresident alien for any part of the tax year and did not elect to be treated as a nonresident for tax purposes.
  • No Double Benefit Test – You did not claim the Hope Credit, Lifetime learning credit, the American Opportunity Credit, the tax-free portion of the Coverdell education savings account for the same qualified expenses for the same student. In other words, no double tax benefit allowed. You did not claim qualified expenses paid for by tax-free educational assistance such as scholarships, grants, employer provided educational assistance, or any other tax-free payments received as educational assistance. However, if you have these assistances, you can still claim the excess of qualified expenses that are not covered by this tax free educational assistance. For example, if your tuition is $9,000 and you have a scholarship of $8,000 then you cannot claim the $8,000 on your tax return but you can still claim the $1,000 difference.
  • Tuition Refund Test – You did not receive a refund for any qualified education expenses paid.

Who is an eligible student?

  • Student who is enrolled at least half-time of a normal academic load for at least one academic period at the beginning of the tax year.
  • Student has not been convicted of a federal or state felony for possession or distribution of controlled substances in the tax year.

What expenses qualify?

  • Expenses paid for an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education.
  • Tuition fees
  • Student activity fees and expenses paid for course-related books, supplies and equipment if the expenses must be paid to the institution as a condition of enrollment or attendance.
    • Example 1 – Lawrence is a freshman in college in the pre-med program. In addition to tuition, he is required to pay a fee for the rental of laboratory equipment and purchase book from the school. The school has a policy of requiring the students to purchase the books at the institution’s bookstore and to pay the lab rental fees as a requirement of enrollment or attendance. Both student fees and books are qualified educational expenses.
    • Example 2 – Charles and Darwin are sophomore students of California State University and are required to purchase course related books to attend the university. The school does not have a policy on how students should obtain the books, meaning the students can purchase their books from anywhere they wish. Paul bought his books at the university’s bookstore while Piper bought her books from an online bookstore. Both expenses paid for the books are not qualified educational expenses.

What expenses do not qualify?

Medical expenses, insurance, room and board, transportation, similar personal or family expenses even if the expenses must be paid to the institution as a condition of enrollment or attendance.

Can I claim the deduction even if I borrowed the funds?

Most students have student loans in order to pay for their education. Borrowing funds count towards the credit since you will be paying for this not now but in the future.

Source: Publication 970

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