Tax Deductions for Higher Education Expenses

There are certain tax deductions available for higher education expenses incurred. These are separate from tax credits, which have been discussed in another article: Tax Credits Education. This discussion applies to taxpayers in the U.S.

Student Loan Interest

Interest paid on student loans is tax deductible. More specifically, student loan interest

is an exclusion from income, which means it can reduce a person’s taxable income even if that person does not itemize deductions on schedule A of the federal tax form. There are limits and some restrictions on this type of exclusion. Up to $2,500 per year of student loan interest paid can be excluded from income each year. This amount is phased out if a person’s taxable income exceeds certain limits. For a single person this income limit phase out is between $60,000 and $75,000 per year. For people married filing jointly the phase out is from $120,000 to $150,000 income per year.

Tuition and Fees Deduction

A $4,000 exclusion from income can be taken for tuition and fees paid. Once again this means that the taxpayer can take advantage of this income exclusion even if he or she does not itemize deductions. The amount drops to $2,000 during the phase-out income plateau which is from $65,000- $80,000 for single taxpayers and from $130,000- $160,000 for married filing jointly returns. This exemption cannot be taken if an American opportunity, Hope, or lifetime learning credit has been taken for the student. There are some exceptions to the normal rules for students who attended colleges in certain Midwest disaster areas during particular periods of time. These exceptions can be checked out in IRS Publication 970 which lists the counties involved and the time periods. In general this means that there are greater tax benefits to be had for people who qualify under these rules.

Other Tax Benefits For Higher Education Expenses

There are a number of other situations in which people can take tax deductions for expenses of attending college. One of these has to do with government bonds. More specifically income on series EE bonds issued after January 1, 1990, and all series I bonds is excluded from income. Additionally there are income exclusions for any employer tuition assistance received up to $5,250 per student. For scholarships there are income exclusions for money spent on qualified expenses if the student is enrolled in a degree program and the scholarship was not awarded for services rendered. The entire amount is exempt from FICA even if the student is not enrolled in a degree program. Expenses that qualify in this case are for tuition, fees, and any required course materials such as books, equipment and supplies. There are also special rules for 529 College Savings Plans, and taxpayers should consult IRS Publication 970 for specifics.

It is obviously in the best interest of student loan borrows and college students and their parents to be aware of whatever tax benefits they can derive under the law from college expenses paid.