Four great things about this new education deduction:
This deduction is above the line, which means it reduces your adjusted
gross income (AGI). Deductions which reduce AGI will often give you a
greater tax benefit, because a higher AGI can cause other tax deductions
and credits to be phased out (reduced) or eliminated. Above-the-line
deductions are also more beneficial because you can take them even if
you don't itemize your deductions.
Your expenses don't have to total a certain amount before you can take
the deduction. (For example, you can take this deduction even if the
expenses do not add up to more than 2% of your adjusted gross income.)
The deduction isn't limited by the overall limitation on itemized
deductions.
You can study whatever you want, except sports, games, and hobbies; and
you can even study those if the classes are part of a degree program.
In this article, we answer the following questions about this
deduction:
When can I take this deduction?
Which expenses qualify?
Which expenses do not qualify?
Who qualifies?
How much can I deduct?
When Can I Take This Deduction?
The deduction is available for qualifying expenses paid in 2002, 2003,
2004, or 2005 in connection with:
Enrollment during the year, or
An academic term beginning during the year or the first three months of
the following year
Which Expenses Qualify?
Whatever you pay in tuition or fees to enroll in or attend any
accredited public, private (nonprofit), or proprietary institution above
the high-school level.
Basically, whatever you pay for most college and vocational classes
should qualify.
Which Expenses Don’t Qualify?
You cannot take a deduction for amounts paid for:
Room and board, insurance, medical expense (including student health
fees), transportation, or other similar personal, living, or family
expenses
Course-related books, supplies, equipment, and nonacademic activities,
except for fees require to be paid to the institution as a condition of
enrollment or attendance
Any course involving sports, games, or hobbies, unless such course is
part of the student's degree program
Also, once you figure out all your qualified expenses, you must subtract
any scholarships, educational assistance allowances, or other nontaxable
sources of income spent for educational purposes (other than gifts and
inheritances).
Who Qualifies?
Any qualified expenses that you pay on behalf of yourself, your spouse,
or your dependents are eligible for the reduction.
Exceptions:
If you can be claimed as a dependent on someone's (such as your
parent's) tax return, you cannot claim the higher education deduction.
If you are a married couple filing separate tax returns, you cannot take
this deduction.
How Much Can I Deduct?
For 2004 and 2005 the maximum you can deduct is either $2,000 or $4,000
depending on your adjusted gross income.
If your adjusted gross income is $65,000 or less ($130,000 or less with
a joint return), your maximum deduction is $4,000.
If your adjusted gross income is more than $65,000 but less than $80,001
(more than $130,000 but less than $160,001 with a joint return), your
maximum deduction is $2,000.
If your adjusted gross income exceeds these limits, you don't get any
deduction.
If you are a nonresident alien, you face a special restriction. You must
make a special election to be treated as a resident alien in order to
take this new deduction. See IRS Publication 519: US Tax Guide for
Aliens.
No Double-dipping
You can't deduct or take a credit for the same expense twice.
If you can deduct these expenses under some other provision of the tax
code, such as for employee or business expenses, you cannot claim the
expenses for the higher education deduction.
If you take the Hope Scholarship or Lifetime Learning Credits for a
student, then you cannot also use the higher education deduction for
that student. For information on these, see IRS Topic 605, Education
Credits.
Reducing the Amount You Can Deduct
You must reduce the amount of qualifying tuition and related expenses by
the sum of:
Any distributions from a qualified state tuition program (section 529
plan), except for the portion that represents a return of your
contributions
Distributions from a Coverdell Education Savings Account (formerly known
as an Education IRA), except for the portion that represents a return of
your contributions
Interest in U.S. savings bonds used to pay for higher education, but
only if you treat that interest income as tax-free on your return by
using Form 8815.
For a general overview, see
IRS Publication 970: Tax Benefits for Education. For more
information on deducting higher education expenses, see
Topic 457: Tuition and Fees
Deduction.
Related Articles:
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Tuition & Fees Deduction
Education Tax Credits - The Basics
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