There are several ways in which education expenses can be used to decrease your tax burden. In addition to the Hope Credit, the Lifetime Learning Credit, and the student loan interest deduction, there is also a deduction available for tuition and fees related to educational expenses. Although this deduction can not be taken if you take either of the education credits, it is very beneficial if you do not qualify for the credits, especially considering the stringent requirements of the credit, or if the deduction would result in more tax savings.
The tuition and fees deduction may be used to reduce your income up to $4,000 for qualified expenses paid for you, your spouse, or your dependents. The total amount of the deduction depends on your modified adjusted gross income (MAGI). If your MAGI is below $65,000 ($135,000 if married filing jointly), the maximum tuition and fees deduction is $4,000. However, if your MAGI is between $65,000 and $80,000 (or between $130,000 and $160,000 if married filing jointly), your maximum deduction is only $2,000. If your income is over $80,000 ($160,000 for married filing jointly), you may not claim the deduction.
For this deduction to be taken, certain requirements must be met in regards to the status of the expenses and the institution to which they are paid. For example, the institution to which the expenses are paid must be considered an eligible educational institution as defined by the Department of Education (DOE). This means the school must be eligible to participate in the student aid program offered by the DOE. Also, the expenses must be qualified education expenses. This includes tuition and other related expenses that are required for enrollment of the school. Related expenses only qualify if they must be paid to the institution as a condition of attendance. For example, the purchase of books is often not considered a qualified expense because, while they are required to attend enrolled classes, they do not have to be purchased from the institution. However, other supplies and fees that are paid directly to the school, such as student activity fees or certain rental fees, are qualified related expenses. Likewise, insurance, transportation, room and board, and medical expenses are not considered qualified.
As stated earlier, you may not claim the tuition and fees deduction if you or someone else is claiming one of the education credits for the same student. You also may not use this deduction for expenses being claimed for another deduction, such as a business deduction. Qualified expenses paid with tax-free scholarships, grants, or educational assistance programs are also not eligible, or those paid with tax-free interest on U.S. Savings Bonds. You may also not deduct qualified expenses that were used to calculate tax-free distributions from Coverdell accounts or a qualified tuition program. Each of these would be considered a “double benefit” and is not allowed.