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Income limits increased. If you are married and file a joint return, the amount of your student loan interest deduction for 2008 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $115,000 and $145,000. You cannot take a deduction if your MAGI is $145,000 or more. This is an increase from the 2007 limits of $110,000 and $140,000. See chapter 4 of Publication 970 for more information.
Students in Midwestern disaster areas. The definition of qualified education expenses for the tuition and fees deduction is expanded for students in Midwestern disaster areas. See Students in Midwestern disaster areas , for more information.
This chapter discusses the education-related adjustments you can deduct in figuring your adjusted gross income.
This chapter covers:
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Educator expenses,
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The student loan interest deduction, and
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The tuition and fees deduction.
Publication
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970 Tax Benefits for Education
Form (and Instructions)
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8917 Tuition and Fees Deduction
If you were an eligible educator in 2008, you can deduct up to $250 of qualified expenses you paid in 2008 as an adjustment to gross income, rather than as a miscellaneous itemized deduction. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.
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Tax-free distribution of interest under an education savings bond program (Form 8815). See Figuring the Tax-Free Amount in chapter 10 of Publication 970.
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Tax-free distribution of earnings from a qualified tuition program (QTP). See Figuring the Taxable Portion of a Distribution in chapter 8 of Publication 970.
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Tax-free distribution of earnings from a Coverdell education savings account (ESA). See Figuring the Taxable Portion of a Distribution in chapter 7 of Publication 970.
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Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2.
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008. Table 19-1 summarizes the features of the student loan interest deduction.
Table 19-1. | Student Loan Interest Deduction at a Glance |
Do not rely on this table alone. Refer to the text for more details. |
Feature | Description | |
Maximum benefit | You can reduce your income subject to tax by up to $2,500. | |
Loan qualifications | Your student loan: | |
• |
must have been taken out solely to pay qualified education expenses, and | |
• | cannot be from a related person or made under a qualified employer plan. | |
Student qualifications | The student must be: | |
• | you, your spouse, or your dependent, and | |
• | enrolled at least half-time in a degree program. | |
Time limit on deduction | You can deduct interest paid during the remaining period of your student loan. | |
Phaseout | The amount of your deduction depends on your income level. |
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
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For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan,
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Paid or incurred within a reasonable period of time before or after you took out the loan, and
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For education provided during an academic period for an eligible student.
Loans from the following sources are not qualified student loans.
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A related person.
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A qualified employer plan.
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An individual can be your dependent even if you are the dependent of another taxpayer.
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An individual can be your dependent even if the individual files a joint return with a spouse.
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An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,500 for 2008).
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The expenses relate to a specific academic period.
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The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period.
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Your spouse,
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Your brothers and sisters,
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Your half brothers and half sisters,
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Your ancestors (parents, grandparents, etc.),
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Your lineal descendants (children, grandchildren, etc.), and
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Certain corporations, partnerships, trusts, and exempt organizations.
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.
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Tuition and fees.
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Room and board.
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Books, supplies, and equipment.
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Other necessary expenses (such as transportation).
The cost of room and board qualifies only to the extent that it is not more than the greater of:
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The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
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The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met.
You cannot claim a student loan interest deduction for any of the following items.
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Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments.
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Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.
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Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. For more information, see Student Loan Repayment Assistance in chapter 5 of Publication 970.
Generally, you can claim the deduction if all four of the following requirements are met.
Your student loan interest deduction for 2008 is generally the smaller of:
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$2,500, or
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The interest you paid in 2008.
However, the amount determined above is phased out (gradually reduced) if your MAGI is between $55,000 and $70,000 ($115,000 and $145,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $70,000 or more ($145,000 or more if you file a joint return). For details on figuring your MAGI, see chapter 4 of Publication 970.
Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970.
To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2008 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by February 2, 2009.
For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. For information on allocating payments between interest and principal, see chapter 4 of Publication 970.
To claim the deduction, enter the allowable amount on Form 1040, line 33, or Form 1040A, line 18.
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education, as explained later under What Expenses Qualify .
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.
Table 19-2 summarizes the features of the tuition and fees deduction.
You may be able to take a credit for your education expenses instead of a deduction. You can choose the one that will give you the lower tax. See chapter 35, Education Credits, for details about the credits.The following rules will help you determine if you can claim the tuition and fees deduction.
Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.
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You paid qualified education expenses of higher education.
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You paid the education expenses for an eligible student.
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The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption (defined in chapter 3) on your tax return.
Qualified education expenses are defined under What Expenses Qualify . Eligible students are defined later under Who Is an Eligible Student .
You cannot claim the tuition and fees deduction if any of the following apply.
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Your filing status is married filing separately.
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Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
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Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
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You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
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You or anyone else claims a Hope or lifetime learning credit in 2008 with respect to expenses of the student for whom the qualified education expenses were paid.
Table 19-2. | Tuition and Fees Deduction at a Glance |
Do not rely on this table alone. Refer to the text for more details. |
Question | Answer | |
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What is the maximum benefit? | You can reduce your income subject to tax by up to $4,000. | |
Where is the deduction taken? | As an adjustment to income on Form 1040, line 34, or Form 1040A, line 19. | |
For whom must the expenses be paid? | A student enrolled in an eligible educational institution who is either: •you, •your spouse, or •your dependent for whom you claim an exemption. |
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What tuition and fees are deductible? | Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board. |
The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or your dependent(s) for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses paid in 2008 in connection with enrollment at an institution of higher education during 2008 or for an academic period (defined earlier under Student Loan Interest Deduction ) beginning in 2008 or in the first 3 months of 2009.
For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
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Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution
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For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
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For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts.
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The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
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The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
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You cannot do any of the following.
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Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense.
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Deduct qualified education expenses for a student on your income tax return if you or anyone else claims a Hope or lifetime learning credit for that same student for the same year.
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Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and in chapter 8 (QTP) of Publication 970.
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Deduct qualified education expenses that have been paid with tax-free interest on U.S. savings bonds (Form 8815). See Figuring the Tax-Free Amount in chapter 10 of Publication 970.
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Deduct qualified education expenses that have been paid with tax-free scholarship, grant, or employer-provided educational assistance. See the following section on Adjustments to qualified education expenses .
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The tax-free part of scholarships and fellowships (see chapter 1 of Publication 970),
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Employer-provided educational assistance (see chapter 11 of Publication 970),
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Veterans' educational assistance (see chapter 1 of Publication 970), and
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Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
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Payment for services, such as wages,
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A loan,
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A gift,
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An inheritance, or
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A withdrawal from the student's personal savings.
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The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
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The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board).
Qualified education expenses do not include amounts paid for:
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Insurance,
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Medical expenses (including student health fees),
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Room and board (but see Students in Midwestern disaster areas under Qualified Education Expenses , earlier, for an exception,
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Transportation, or
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Similar personal, living, or family expenses.
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.
For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (defined earlier). The student must have either a high school diploma or a General Educational Development (GED) credential.
Generally, to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:
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Have paid the expenses, and
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Claim an exemption for the student as a dependent.
Table 19-3 summarizes who can claim the deduction.
The maximum tuition and fees deduction in 2008 is $4,000, $2,000, or $0, depending on the amount of your MAGI. For details on figuring your MAGI, see chapter 6 of Publication 970.
Figure the deduction using Form 8917.
To help you figure your tuition and fees deduction, you should receive Form 1098-T, Tuition Statement. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by February 2, 2009.
To claim the deduction, enter the allowable amount on Form 1040, line 34, or Form 1040A, line 19, and attach your completed Form 8917.
Table 19-3. | Who Can Claim a Dependent's Expenses |
Do not rely on this table alone. See Who Can Claim a Dependent's Expenses in chapter 6 of Publication 970. |
IF your dependent is an eligible student and you... | AND... | THEN... |
claim an exemption for your dependent | you paid all qualified education expenses for your dependent | only you can deduct the qualified education expenses that you paid. Your dependent cannot take a deduction. |
claim an exemption for your dependent | your dependent paid all qualified education expenses | no one is allowed to take a deduction. |
do not claim an exemption for your dependent, but are eligible to | you paid all qualified education expenses | no one is allowed to take a deduction. |
do not claim an exemption for your dependent, but are eligible to | your dependent paid all qualified education expenses | no one is allowed to take a deduction. |
are not eligible to claim an exemption for your dependent | you paid all qualified education expenses | only your dependent can deduct the amount you paid. The amount you paid is treated as a gift to your dependent. |
are not eligible to claim an exemption for your dependent | your dependent paid all qualified education expenses | only your dependent can take a deduction. |
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