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Plan Well, Retire Well

Saving and investing your money

Tuition and Fees Deduction Keeps Going, and Going, and Going . . . at least until the end of 2013

This deduction has driven me crazy over the years. When the Higher Education Expense Deduction (aka Tuition and Fees Deduction) was introduced in 2002, it was supposed to be temporary and expire at the end of 2005. It has now been extended a total of 4 times, two of which were retroactive after it had already expired. The deduction is now scheduled to expire at the end of 2013. Who knows what will really happen. But that's why you're reading about it here instead of on our newly updated website, Tax Breaks for Higher Education. Ever-changing deductions like this play havoc with keeping a website up to date, so we decided to deal with moving targets like this here on the Blog.

If you meet the income requirements for this deduction, it is pretty flexible otherwise. You don't have to be enrolled in a degree program, or be taking a certain number of classes. You just have to pay for expenses for you, your spouse, or your dependent to take at least one class from an eligible institution, and that definition is pretty broad. According to IRS Publication 970, it is "any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution."

You take this deduction "above the line," meaning that it reduces your adjusted gross income (AGI), and you don't have to itemize deductions in order to claim it. Reducing your AGI could improve your eligibility for other kinds of need-based aid, or additional tax deductions and credits.

But there's no double-dipping. If you claim the Tuition and Fees deduction, you cannot also claim the American Opportunity (Hope) or Lifetime Learning Credit for the same student. You may, however, claim it for the expenses of a different student. Things you can do in the same year and for the same student are take tax-free distributions from a Coverdell Education Savings Account or Qualified Tuition Program, or use the savings bond interest deduction. But you'll have to reduce the qualified expenses on which you calculate the Higher Education Expense Deduction

A maximum of $4000 can be deducted by single taxpayers with incomes up to $65,000 or married taxpayers with joint incomes up to $130,000. Taxpayers with higher incomes (single filers with incomes between $65,000 and $80,000, and joint filers between $130,000 and $160,000) can claim a deduction of up to $2000. Taxpayers with income above those limits cannot claim the deduction.

The deduction can be used for tuition and fees; books, room and board are not allowable expenses.

If the student is a dependent, the parent must pay the expenses in order to take the deduction. If the student is not a dependent, the student can take the deduction for expenses paid either by the student or paid by someone else, which are treated as a gift to the student. The deduction could be lost if a dependent pays the expenses himself; neither the dependent nor the parent will be able to claim the deduction.

Like many other tax breaks for education, married couples must file jointly to claim it; married persons filing separately are not eligible.

It could turn out that the American Opportunity Credit or the Lifetime Learning Credit is a better deal for you, if you're also eligible for them. Your tax prep software should help you make the call, or you can figure your taxes both ways to see what works best in your situation. But there's a lot to like about this temporary-yet-persistent tax break.

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