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What are qualified higher education expenses?
What's the history behind the higher education tax benefits?
For many students and their parents, tax season is a time of grumbling and groaning. Forms, paperwork, and the April 15 tax filing deadline can add stress to an already hectic life. But if you're paying off student loans or paying for college tuition and fees, your higher education investment might help you in a way you didn't expect — by reducing your tax bill.
There are three higher education related tax benefits that students and parents may be able to take advantage of:
Student and parent borrowers may be able to claim the student loan interest deduction, under which borrowers may deduct interest payments they made on their higher education loans during the 2008 tax year. The deduction allows a borrower to reduce his or her total taxable income by as much as $2,500.
The student loan interest deduction can be of particular value to recent college graduates. Unlike tax credits that require a taxpayer to earn a large enough income to take advantage of them, the student loan interest deduction is restricted to taxpayers at or below a maximum income and reduces the amount of the taxpayer's income subject to federal taxes prior to the application of other tax deductions.
What Interest Is Eligible?
For a taxpayer to claim the interest deduction, the interest paid must meet certain conditions:
Interest that has been paid by a third party on the borrower's behalf qualifies.
Interest that a borrower has paid on a loan even when interest payments are not required (such as when a Stafford loan is in deferment status) can also qualify.
Payment of loan origination fees and capitalized interest can be included as qualified interest payments.
Interest Deduction Income Limits
The following income limits apply to a taxpayer's eligibility to claim the student loan interest deduction on his or her 2008 income tax return:
How Do I File for a Deduction?
The student loan interest deduction is an adjustment to income. To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 32 (Form 1040NR), or line 9 (Form 1040NR-EZ). Go to http://www.irs.gov/formspubs/index.html to access the forms.
The tuition and fees deduction allows a taxpayer to deduct as much as $4,000 from his or her taxable income for qualified education expenses, such as tuition and fees*, paid for the taxpayer and the taxpayer's spouse or dependents.
* For 2008, the definition of qualified education expenses is expanded for students attending an eligible educational institution in the Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin.
For the current tax filing season, qualified higher education expenses paid in 2008 for enrollment during that year or for an academic period beginning any time from January 1, 2008, to March 31, 2009, may be applied towards the tuition and fees deduction.
The deduction may not be claimed for tuition and fees applied towards either the Hope tax credit or the Lifetime Learning tax credit in the same tax year.
Tuition and Fees Deduction Income Limits
The following income limits apply to a taxpayer's eligibility to claim the tuition and fees deduction on their 2008 income tax return:
How do I File for a Deduction?
The tuition and fees deduction may be claimed by completing Form 8917 and submitting it with the Form 1040 or Form 1040A. Enter the deduction on Form 1040, line 34, or Form 1040A, line 19. Go to http://www.irs.gov/formspubs/index.html to access the Form 1040.
The Hope and Lifetime Learning tax credits help a taxpayer offset the costs of higher education by directly reducing the amount of his or her income tax.
Both credits are claimed for qualified tuition and related expenses paid during the tax year. However, a taxpayer may only claim one credit against a student's higher education expenses for a particular tax year. Also, neither credit may be claimed if a taxpayer chooses to utilize the tuition and fees deduction.
Tax Credit Comparison
| Hope Credit | Lifetime Learning Credit |
|---|---|
| Only available for first two years of student's higher education | Available for all years of student's higher education and for courses to acquire or improve job skills |
| Maximum annual amount of $1,800 per student* | Maximum annual amount of $2,000 per tax return |
| Student must be pursuing undergraduate degree or other recognized education credential | Student need not be in a degree program of any kind |
| Student must have been enrolled at least half time during at least one academic period beginning in the tax year | Available for student taking one or more college courses |
| Student must not have had a felony drug conviction on his or her record at the end of the tax year | No restrictions regarding drug convictions |
* For tax years beginning in 2008 and 2009, the education credits are expanded for students attending an eligible educational institution in a Midwestern disaster area.
Tax Credit Income Limits
For tax year 2008, the following income limits apply:
In 2008, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your AGI is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return).
How to Claim a Credit
In order to claim either credit, a tax filer must complete and submit Form 8863, "Education Credits (Hope and Lifetime Learning Credits)," using the information on the Form 1098-T sent by the school to the taxpayer; along with his or her Form 1040 or Form 1040A.
TG provides this information as a public service and does not provide individual tax advice. You may wish to review your individual eligibility for these tax benefits with your tax advisor.