The Tuition and Fees Deduction, also known as the Torricelli Deduction or the Limited Deduction for Tuition Expenses, provides an above-the-line exclusion from income based on amounts paid for college tuition and fees. An above-the-line exclusion from income may be claimed even if the taxpayer does not itemize.
Taxpayers can deduct up to $4,000 in college tuition and required fees as an above-the-line exclusion from income. The deduction is reduced to $2,000 for taxpayers with income between the income phaseout thresholds.
Qualified tuition and related expenses includes student activity fees and course materials (books, supplies and equipment), but only if the expenses must be paid to the college or university as a condition for enrollment or attendance. If the course materials expense is not paid directly to the college or university, it is not eligible for the tuition and fees deduction. The qualified expenses must be related to the course of instruction. Costs associated with sports, games, hobbies and noncredit courses are excluded unless specifically part of the student’s degree program.
Taxpayers cannot double dip. Each dollar of qualified higher education expense can be used to justify only one tax benefit. For example, the same tuition expenses cannot be used to justify both a tax-free distribution from a 529 college savings plan and the Tuition and Fees Deduction. However, the portion of a 529 plan distribution or prepaid tuition plan distribution that represents a return of contributions is not subject to this coordination restriction. Likewise, the coordination restrictions mean that tax-free scholarship money cannot be used to pay for expenses for which the taxpayer is also claiming the Tuition and Fees Deduction. However, this restriction does not apply to the taxable portion of scholarships, such as the portion used to pay for living expenses as opposed to tuition and fees. Taxpayers may also use student loan money to pay for expenses that are used to qualify for the Tuition and Fees Deduction.
The Tuition and Fees Deduction is available for an unlimited number of years, unlike the American Opportunity Tax Credit (AOTC).
Expenses paid during the first three months of the next tax year may be counted as though paid during the current tax year.
Students are not required to be degree-seeking to obtain the Tuition and Fees Deduction, but the courses must be taken at a college or university that is eligible for Title IV federal student aid. Part-time enrollment is eligible, including less than half-time enrollment.
Unlike the AOTC, students who have been convicted of a felony drug offense remain eligible for the Tuition and Fees Deduction.
To claim the Tuition and Fees Deduction, the taxpayer must be able to claim an exemption for the student on the taxpayer’s federal income tax return and must list the student as an exemption on the taxpayer’s federal income tax return. The tax deduction is claimed per taxpayer, not per student. Only expenses paid by the taxpayer can be used when calculating the Tuition and Fees Deduction. If the taxpayer claims a dependent student as an exemption and the expenses were paid by the student or anyone else other than the taxpayer, the taxpayer would not be able to claim those expenses. The student, however, might be able to claim those expenses, but only if the student cannot be claimed as an exemption on someone else’s federal income tax return. Students who could have been claimed as an exemption on someone else’s federal income tax return may not claim the Tuition and Fees Deduction.
The tax deduction phases out for taxpayers who file federal income tax returns with adjusted gross income (AGI) between $65,000 and $80,000 (single) and between $130,000 and $160,000 (married filing jointly). Married taxpayers who file separate returns are ineligible. The deduction is reduced for taxpayers with AGI in the phaseout bands. The income phaseouts are not adjusted annually for inflation.
The Tuition and Fees Deduction expired at the end of 2014. Congress may decide to extend it.
Generally, taxpayers who are eligible for both the American Opportunity Tax Credit and the Tuition and Fees Deduction should claim the American Opportunity Tax Credit, as the financial value is greater. A taxpayer in the 25% tax bracket, for example, will obtain a $1,000 reduction in tax liability for the maximum deduction. The AOTC also has greater income phaseouts.
Some taxpayers claim the Tuition and Fees Deduction instead of the tax credits because of the side effects. Since the Tuition and Fees Deduction reduces AGI, it can sometimes qualify the taxpayer for other tax benefits. It can also qualify the taxpayer for various means-tested federal benefit programs.
Note that taxpayers must file an IRS Form 1040 to claim the Tuition and Fees deduction. This precludes families from using the Tuition and Fees Deduction to reduce AGI to qualify for the simplified needs test or automatic zero EFC on the Free Application for Federal Student Aid (FAFSA) form, since taxpayers who are required to file an IRS Form 1040 are ineligible for these simplified financial aid formulas.
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