Educational Tuition and Fees Deduction
Up to $4000 per tax return, not per student, of qualifying higher education tuition and fees may be deductible from federal taxes. The deduction is calculated on Form 8917, Tuition and Fees Deduction and deducted directly from gross income on Form 1040. No deduction is available for expenses of a dependent for whom the American Opportunity Credit or Lifetime Learning Credit is claimed by anyone else nor can a student claim a deduction if anyone can claim her as a dependent, regardless of whether the dependent exemption is actually claimed. Generally, if either tax credits or a deduction can be claimed, then the taxpayer must choose between either, since both cannot be claimed for the same individual in the same tax year. Although tax credits offer larger savings, they are also subject to more restrictive income phaseout rules, so the deduction may offer a bigger tax benefit for higher income taxpayers. This deduction is available for a limited time, until 2020 (Congress may extend this deadline).
The Bipartisan Budget Act, enacted on Feb. 9, 2018, has renewed, for tax year 2017 only, the deductibility of educational tuition and fees. However, the Taxpayer Certainty and Disaster Relief Tax Act of 2019 extended the deductibility of tuition and fees for tax years 2018, 2019, and 2020. The new Consolidated Appropriations Act for 2021 (H.R. 133), signed into law on December 27, 2020, has eliminated the tuition and fees deduction for 2021 and thereafter.
The maximum tuition and fees deduction is $4000 per tax return, if modified adjusted gross income (MAGI) does not exceed $65,000; if MAGI does exceed $65,000 but is less than $80,000, then $2000 can be deducted. For married couples filing jointly, the MAGI limits are $130,000 and $160,000. No deduction is allowed if the MAGI exceeds the upper limits. However, a married couple filing separately cannot claim any deduction.
MAGI = adjusted gross income (AGI) before any deduction for qualified educational expenses minus:
- the exclusion for foreign earned income,
- the foreign housing exclusion or deduction,
- excluded income from Puerto Rico or American Samoa, or
- any deduction for domestic production activities.
For most taxpayers, MAGI = AGI before the deduction for qualified educational expenses is subtracted.
Qualified higher educational expenses include those incurred at any college, university, vocational school, or other postsecondary institution that participates in the financial aid program of the Department of Education. Qualified expenses are deductible in the tax year they are paid for school terms that begin either during the tax year or within the 1st 3 months of the next tax year. Qualified expenses are those incurred by the taxpayer, the taxpayer's spouse or dependents, and includes tuition, books, supplies, equipment, and other fees that must be paid to the school as a condition of enrollment. Qualified educational expenses do not include:
- room and board,
- medical expenses, including student health fees,
- transportation or other personal or family expenses, even if such expenses must be paid as a condition of enrollment.
Expenses for noncredit courses do not qualify nor do expenses for classes of sports, games, or hobbies unless they are part of the student's degree program. Some institutions bundle fees, in which case, the institution is required to send a Form 1098-T, Tuition Statement to the student, showing the allocation of qualified educational expenses and nonqualified expenses.
To deduct the expenses of a dependent, the taxpayer must have paid them and must have actually claimed the dependent exemption for the student. Any expenses that are reduced through tax-free educational assistance, tax-free scholarships, excluded interest from United States savings bonds that were used to pay for qualified educational expenses, and earnings from a Coverdell Education Savings Account or a Qualified Tuition Program reduces the amount of the deduction. If the expenses were paid under a divorce decree, then those expenses will be treated as if the student paid them, so only the student can claim the deduction and only if he has not been claimed as a dependent.
If the expenses are paid by anyone other than the immediate family, even if they are paid directly to the educational institution, then tax law treats the payment as if it was given to the student, who then paid the expenses. In such a case, only the student can claim a deduction for the expenses paid and only if the student cannot be claimed as a dependent. So if a grandparent pays the qualified educational expenses for a grandchild directly to the educational institution, then only the grandchild can deduct the paid expenses and only if he is not claimed as a dependent.
If any tax-free educational assistance or a refund of expenses was provided after having been deducted, the amount must be recaptured by including the refunded amount as income for the year in which it was received. However, if a student withdraws but the paid qualified educational expenses were not refunded, then a deduction can still be claimed.
The tuition and fees deduction is claimed by filing Form 8917, Tuition and Fees Deduction, which is filed with the claimant's tax return.
Any refunds of qualified educational expenses or any reduction in expenses because of other tax benefits reduces the deductible amount. If the deduction has already been taken, then the refunded amount or the reduction in the expenses must be added back to the income of the taxpayer in the year in which the refund or reduction occurred but only to the extent that the amount reduced taxes in the year of the deduction.