Once again, Congress saved the tuition and fees deduction from extinction. Several times in the past, this deduction has been allowed to lapse, only to be renewed at the last minute. This time the save was about as last-minute as possible – it was extended in December 2014 and made retroactive to the 2014 tax year.
The tuition and fees deduction is available to anyone who pays the qualified tuition and fee expenses for an eligible student. The student could be you, your spouse, one of your children, or any other dependent that you claim. It is also an above-the-line deduction, meaning that it reduces your taxable income and you can claim it whether you itemize your deductions or not.
Tuition and fee expenses cannot be deducted if others paid for them (employers, scholarships, grants, etc.) or if they are paid with tax-free money such as savings bonds. For a fee to be included in the deduction, it must be a requirement for college attendance, such as prescribed books and compulsory student-activity fees. Room and board, insurance, medical expenses and similar charges are not eligible.
You can claim up to $4,000 in deductions, assuming you meet the following criteria:
- Income Limit – You must have a modified adjusted gross income (MAGI) of $65,000 or below if single ($130,000 if married filing jointly) to receive the full $4,000 deduction, and $80,000 or below ($160,000 married filing jointly) to claim a maximum deduction of $2,000. People with higher incomes do not qualify.
The instructions to calculate MAGI for purposes of this deduction may be found in IRS Publication 970, “Tax Benefits for Education.” In essence, MAGI is the same as adjusted gross income (AGI) with several deductions added back.
- Filing Status – You must file as a single or married filing jointly. You are not eligible if you choose the status of married filing separately.
- Residency – If you or your spouse were considered a non-resident alien during any part of the 2014 tax year, you cannot claim this deduction.
- Exemption Status – If anyone else can claim the student on his or her return, you cannot claim the deduction. It does not matter whether or not that person actually does claim the student; it is the capability to do so that is important.
- Tax Credit Status – You cannot take both education tax deductions and tax credits. Tax credits are generally more lucrative if you qualify, and that may be one reason the tuition and fees deduction is always targeted for extinction.
- No Double Dipping – You are not eligible for this deduction if you claimed the expenses under a different deduction category, such as business expenses.
Expenses are deducted at the time of payment, not when the classes begin. Payments made in December 2014 for the first semester of 2015 are deductible in 2014; payments made in December 2013 for the first semester of 2014 were deductible in tax year 2013.
Before taking the tuition and fees deduction, see if you qualify for the American Opportunity Credit (up to $2,500) or the Lifetime Learning Credit (up to $2,000). Both are tax credits that are directly subtracted from the tax you owe, and are independent of the tax bracket – thus lower-income taxpayers receive a greater benefit through the credit. For example, the maximum $4,000 deduction only reduces the taxes of someone in the 25% tax bracket by $1,000.
Publication 970 summarizes all of your options for educational tax relief, including both credits and deductions. Look it over to determine your best choices, and seek professional tax help if you are not sure which path is best. If you decide to take the tuition and fees deduction, do it soon. As of this writing, the tuition and fees deduction has not been renewed for tax year 2015, and it would not be a huge surprise if this were the year when Congress finally fails to renew the deduction.
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