Taxes From A To Z: T Is For Tuition & Fees Deduction

T is for Tuition and Fees Deduction.

College can be expensive. Crazy expensive. I say this as a former student now repaying tons of student loans – and eying my three kids and thinking about how in the world I’m going to pay for them, too.

Fortunately, there are some tax breaks available for paying for college. You may be able to deduct qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction. The deduction can reduce the amount of your income subject to tax by up to $4,000 so long as your modified adjusted gross income (MAGI) is not more than $80,000 ($160,000 if filing a joint return).

I know what you’re thinking: not another itemized deduction. No worries. You do not have to itemize to take this deduction. It’s considered an above the line deduction and is taken on line 40 on your federal form 1040.

You cannot claim the tuition and fees deduction if your filing status is married filing separately or if you may be claimed as a dependent on someone else’s return. Notice I said “may” – and this is important – because you cannot take the deduction even if the other person does not actually claim that exemption.

You calculate the deduction based on qualified education expenses you pay for yourself, your spouse, or a dependent. To claim those expenses on your 2011 federal form 1040, you must have paid those expenses in 2011 (even if you paid with the assistance of a loan – but see below). To figure the amount that you claim, you’ll file a federal form 8917 (downloads as a pdf).

For purposes of the tuition and fees deduction, qualified education expenses are tuition (clearly) and related expenses required for enrollment or attendance at an eligible educational institution (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). Related expenses are narrowly defined as student-activity fees and expenses for course-related books, supplies, and equipment if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), transportation, room and board, and similar personal, living, or family expenses – even if the payment of these expenses is a condition of enrollment or attendance.

You can use money that you borrow in order to calculate the deduction but you cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.

If you don’t qualify for the above the line tuition and fees deduction, you may still be able to claim tuition expenses on your tax return. You might be able to claim an education credit such as the American Opportunity, Hope or Lifetime Learning credit (but you can’t claim both). Or, depending on the course of study and your own situation, tuition may qualify as a business expense. If you’re not sure how to claim your deduction (or credit), check with your tax pro.