Educational Expenses Amanda Beavers Eddie Bradford Nichole Hartfield Table of Contents Suggested Reading Introduction Qualified Tuition and Related Expenses Deduction Student Loan Interest Deduction Hope Scholarship Credit Lifetime Learning Credit Additional Tax Relief Options Summary
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Tuition and fees required for the enrollment and attendance of the following parties: the taxpayer, the taxpayer’s spouse, or any dependent(1) of the taxpayer at an eligible educational institution.(2)Qualified Tuition and Related Expenses Deduction
What is considered an eligible educational institution?
Who is considered an eligible student?
An educational expense deduction shall be reduced by the following:
In 2004, Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan.
The terms of the scholarship state that it may be used to pay any of Jackie's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring the tuition and fees deduction, she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2004.
Qualified Education Expenses defined as(18):
Year You Made Interest Adjustments
1998 – 2001
2002 and later
Interest Deduction Allowed:
No deduction allowed.
Interest paid during the first 60 months that interest payments are required on the student loan.
All interest paid on student loan during year, both required and voluntary payments.Student Loan Interest Deduction: History(18)
The payments on Roger's student loan were scheduled to begin in June 2003, 6 months after he graduated from college. He began making payments as required. In September 2004, Roger enrolled in graduate school on a full-time basis. He applied for and was granted deferment of his loan payments while in graduate school. Wanting to pay down his student loan as much as possible, he made loan payments in October and November, 2004.
Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November.
Who can qualify for this credit?
Who CANNOT qualify for this credit?
What additional criteria exist to qualify as an eligible student for this credit?
Per Taxable Year (up to two taxable years):
In 1999, Taxpayer A has two dependents, B and C, both of whom are eligible students. Taxpayer A pays $1,600 in qualified tuition and related expenses for dependent B to attend a community college. Taxpayer A pays $5,000 in qualified tuition and related expenses for dependent C to attend University X.
Taxpayer A may claim a Hope Scholarship Credit of $1,300 ($1,000 + (.50 * $600)) for dependent B, and the maximum $1,500 Hope Scholarship Credit for dependent C, for a total Hope Scholarship Credit of $2,800.
Per Taxable Year:
Bruce and Toni Harper are married and file a joint tax return. For 2004, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2004, Toni paid $6,000 of qualified education expenses for her Fall 2004 semester.
Bruce and Toni can claim a $1,200 (20% × $6,000) lifetime learning credit on their 2004 joint tax return.
IF you... Adjustments
claim an exemption on your tax return for a dependent who is an eligible student
you can claim the Hope or Lifetime credit based on that dependent's expenses. The dependent cannot claim the credit.
do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption)
the dependent can claim the Hope or Lifetime credit. You cannot claim the credit based on this dependent's expenses.Hope/Lifetime Credits: Treatment of Dependent’s Expenses(29)
Hope Scholarship Credit Adjustments
Up to $1,500 per eligible student
Available for only 2 years per student
Must be pursuing a degree
Lifetime Learning Credit
Up to $2,000 per return
Does not have a year requirement
Do not need to be pursuing a degreeHope vs. Lifetime: Summary(29)
Hope Scholarship Credit Adjustments
Must be enrolled at least half time for at least one period during the year
No felony drug conviction on student’s record
Lifetime Learning Credit
Available for one or more courses
Felony drug conviction rule does not applyHope vs. Lifetime: Summary(29)
The following chart illustrates the coordination restrictions by assigning each program to a column and a row, and placing a letter at each intersection to indicate the nature of any coordination restrictions. If the letter 'X' is used, it indicates that the same expenses may not be used as the basis for both programs. If the letter 'C' is used, it indicates that the programs may not be used for the same child during the same year. If the intersection is blank, it means that there are no coordination restrictions.
Here are a few links to additional sources related to this topic:
(1) IRC § 25A(g)(3)(B) – “qualified tuition and related expenses paid by a dependent is treated as being paid by the taxpayer”
(2) IRC § 25A(f)
(3) Reg. §1.25A-2(b)
(4) IRC § 25A(b)(3)
(5) Reg. §1.25A-2(d)(2)(ii) “must be used in a particular course of study and are paid to the eligible educational institution”
(6)Reg. §1.25A-2(d)(2)(iii) “must be paid to the eligible educational institution for the enrollment or attendance of the student”
(7)Reg. §1.25A-2(d)(3) “Qualified tuition and related expenses do not include the costs of room and board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses, regardless of whether the fee must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.”
(8)Reg. §1.25A-2(d)(5) “Qualified tuition and related expenses do not include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course, unless the course or other education is part of the student's degree program, or in the case of the Lifetime Learning Credit, the student takes the course to acquire or improve job skills.”
(9)IRC § 222(b)(2)(A)(i)
(10)IRC § 222(b)(2)(B)(i)
(11)IRC § 222(b)(2)(B)(ii)
(12)IRC § 222(b)(2)(B)(iii)
(13)IRS Publication 970 Chapter 6 “The tuition and fees deduction is available for 4 years, 2002 through 2005.”
(14)IRC § 25A(g)(2)(A)
(15)IRC § 25A(g)(2)(B)
(16) IRC § 25A(g)(2)(C)
(17)Example taken from IRS Publication 970 Chapter 6
(18) Information and example taken from IRS Publication 970 Chapter 4
(20)IRS Publication 970 Chapter 2
(21)IRC § 25A(b)(2)(A) “CREDIT ALLOWED ONLY FOR 2 TAXABLE YEARS. An election to have this section apply with respect to any eligible student for purposes of the Hope Scholarship Credit under subsection (a)(1) may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such student for any 2 prior taxable years.”
(22)I.R.C. § 25A(b)(2)(C) “CREDIT ALLOWED ONLY FOR FIRST 2 YEARS OF POSTSECONDARY EDUCATION. --The Hope Scholarship Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 2 years of postsecondary education at an eligible educational institution.”
(23)IRC § 25A(b)(1)(A)
(24)IRC § 25A(b)(1)(B)
(25)Example taken from Reg. §1.25A-2
(26)IRC § 25A(c)(2)(A) “COORDINATION WITH HOPE SCHOLARSHIP. --The qualified tuition and related expenses with respect to an individual who is an eligible student for whom a Hope Scholarship Credit under subsection (a)(1) is allowed for the taxable year shall not be taken into account under this subsection.”
(27) IRC § 25A(c)(1)
(28)Example taken from IRS Publication 970 Chapter 3
(29) Tables from IRS Publication 970
(30) Chart taken fromhttp://www.finaid.org/savings/taxbenefitcoordination.phtml