Anyone paying higher education expenses might want to study his or her tax return. The 1040 and 1040A contain a valuable lesson on how to write off up to $4,000 of college costs without having to itemize.
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The tuition-and-fees deduction's immediate attraction is that it doesn't require you to itemize your expenses on Schedule A. It's one of the income adjustments, also commonly called above-the-line deductions, found directly on the first page of tax return Form 1040 and Form 1040A.
In addition to counting qualified education expenses paid for academic periods the previous tax year, you also can claim eligible expenses you paid last year to cover school sessions that begin during the first three months of this tax year. For example, if you paid $1,500 last December for course work that begins March 1, that prepayment can count in figuring your current deduction amount.
This tax break can be claimed on 2013 returns, but unless Congress renews it, it's no longer in effect for the 2014 tax year or beyond.
Applies only to specific expenses
The deduction, however, is not without limits.
Note the name. Only payments for tuition and fees count. No room, board or, in most cases, book costs are eligible.
Also, be sure your courses pass Internal Revenue Service inspection. In addition to being college-level, they must be for legitimate educational reasons. Sport, hobby or noncredit courses don't qualify unless the class is required as part of a degree program; for example, an archery class necessary to earn your bachelor's in physical education.
Did you use other tax-advantaged education funds to pay your schooling costs? Those distributions could reduce, or possibly eliminate, this tuition-and-fees tax deduction. If you used money from a state tuition plan, a Coverdell educational savings account or interest on savings bonds you cashed to pay for class, you have to subtract those amounts from your expenses to arrive at the allowable deductible amount.
Some filing-status issues need to be considered. Married couples, for example, must file a joint return to take this deduction.
If you're a college student who is claimed as a dependent on your parents' return, be careful when it comes to this tax break. You can't take the deduction yourself even if you paid your tuition with your own money. In this case, neither you nor your parents get the deduction. And even if your parents don't claim you as a dependent, if they can, that possibility alone means you can't take the tuition-and-fees tax break.
Then there are the money limits.
The tuition-and-fees deduction could be as much as $4,000. This amount, however, applies to all qualified expenses paid last year, not paid per student.
So you can't claim the $4,000 spent toward your MBA course work and another $4,000 you paid for your daughter's freshman year at State U. (However, if your course work is employment-related, you might be able to claim it as a miscellaneous expense on Schedule A. Remember, though, you'll have to meet the 2% of adjusted gross income threshold for the schooling costs to be of any itemized tax benefit.)
There also are income limits. Single filers who make less than $65,000 or married joint filers earning less than $130,000 can take the full four-grand deduction. If you make more than those amounts, but less than $80,000 as a single filer or $160,000 when married filing jointly, you can deduct up to $2,000 in tuition and fees.
Earn more than the top limits for your filing status, and you're out of tax deduction luck.
Only one tax break per filer
The IRS also frowns on double dipping in the tax-break pool. You can't claim the tuition-and-fees deduction if you also take the lifetime learning credit or the American opportunity credit for the same student in the same tax year.
In addition, in deciding which tax break to use, make sure you choose the optimal one if you qualify for several education-assistance options. You might be tempted to go for the tuition-and-fees deduction. After all, it's worth $4,000 and relatively easy to claim.
The credit amounts, meanwhile, are less: a maximum of $2,000 for the lifetime learning and $2,500 for the American opportunity credits. Those figures mean the larger tuition-and-fees deduction is the way to go, right?
Not so fast. You're comparing an apple (a tax deduction) to oranges (tax credits).
A tax deduction reduces your taxable income, while a credit reduces your actual tax bill. In almost every instance, a credit is preferable.
For a quick comparison of the educational tax breaks, multiply your deductible schooling costs by your tax rate to see how it matches up with the credits. For example, a $4,000 deduction for a taxpayer in the 25% tax bracket comes to an actual tax break of only $1,000.
So, if you have a choice of how to take your education tax break, run the numbers both ways to make sure you take the one that saves you more.
Additional tax-filing homework
While the tuition-and-fees deduction is available for taxpayers who don't itemize their expenses, there is a bit more paperwork involved in taking this deduction.
If you claim this education expenses deduction, either on Form 1040 or Form 1040A, you must now fill out Form 8917.
Once you complete Form 8917 and transfer the appropriate amount to your 1040 or 1040A, be sure to send the form along with your final tax return.
In addition to the information found in the Form 8917 instructions (which are part of the downloadable form itself), you can learn more about the tuition-and-fees deduction and other education tax breaks in IRS Publication 970, Tax Benefits for Education.
Copyright 2014, Bankrate Inc.