A Look into the Tuition and Fees Deduction (vs. the Education Credits)

April 15th is fast approaching, and you still haven’t figured out which deductions or credits you can take for education?  Here at Money Under Your Futon you can find the summarized, cramming-two-days-before-the-exam version of the IRS publication 970, which explains in detail each of the education benefits available for 2009 income taxes.

Last week we wrote about the three education tax credits offered this year: the American Opportunity, the Hope, and the Lifetime Learning credits (to read the article click here).  Today, we add to it a break-down of the Tuition and Fees deduction.  The general rules for this deduction, in terms of what qualifies as an educational institution and payments on whose behalf can be deducted are the same as for the credits.  As explained in the previous article:

An eligible educational institution [is defined as an] institution eligible for the Federal Student Aid (FSA) program administered by the Department of Education. 

Another element that holds across the board is that you can only claim the credit [or deduction] for a student for which you have also claimed an exemption.  That is, you can claim the credit for your own education – as long as you meet the other requirements – as well as for other people who are claimed as your dependents. 

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Tuition and Fees deduction

Unlike a credit which directly lowers the amount of taxes you owe dollar for dollar, a deduction decreases the amount of your income that is taxable (indirectly decreasing the amount of taxes you owe).  For each student, you can only take either the Tuition and Fees deduction or one of the education credits.

Eligibility

MAGI: full deduction ($4,000) for individuals with MAGIs below $65,000 or couples filing jointly with MAGIs below $130,000; half deduction ($2,000) for those with MAGI within $65,000-80,000 and $130,000-160,000, respectively.

Student: enrolled in an eligible educational institution and already has a high school or GED credential.  There is no limit to how many years you can take this deduction.

Expenses: just like the Hope and Lifetime Learning credit, eligible expenses are limited to tuition and other expenses required for enrollment.  Fees and expenses for course-related books, supplies and equipment are only eligible if they are required for attendance.  Payments must have been made in 2009 for qualifying expenses in 2009 or in the first 3 months of 2010.

And, again, similar to the Hope and the Lifetime Learning credit, for students in the Midwestern disaster area who were enrolled at least half-time in 2009, “reasonable costs” for room and board are also deductible, up to the largest of these two: (a) the cost for room and board as calculated by the educational institution attended or (b) the actual amount charged if the student is living in housing owned or operated by the educational institution.

Benefit: you can deduct your tuition and fees expenses up to $4,000 if your MAGI is $65,000 or less ($130,000 if married filing jointly); or up to $2,000 if your MAGI falls within $65,000-80,000 ($130,000-160,000 if filing jointly).

Further information: You can take the Tuition and Fees deduction even if you do not itemize your deductions (line 19 on form 1040A or line 34 on Form 1040).  Just make sure to submit Form 8917 (Tuition and Fees Deduction) when filing.

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If you are eligible for more than one credit, or for the Tuition and Fees deduction and another credit, you can calculate your taxes both ways and chose the one that allows you to pay the least.  If you are eligible to take either the American Opportunity or the Hope credit, it is possible that one of those will give you a lower final tax liability than the deduction.  However, the Tuition and Fees deduction offers more flexibility than these two credits in that it covers expenses for all higher education in eligible institutions (rather than just the first 4 years or first 2 years of post-secondary education, respectively).

The income limit for this deduction is also higher than that for the Lifetime Learning credit.  While only individuals with a MAGI lower than $50,000 can get the educational credit, the full Tuition and Fees deduction is available to individuals with MAGIs up to $65,000, for example.

Although the variation in the rules and benefits for each deduction and credit can be confusing, a careful look at your tax form to make sure you choose the best one for you is certainly still worth it.  As everyone learned in school at one point or another, pouring over papers and books is not always fun – but there are often rewards at the end, whether that is in the form of better grades or money saved.

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