The Tuition and Fees Deduction expired at the end of 2014, but that doesn’t necessarily mean it won’t be available in 2015. The Tuition and Fees Deduction has a judicial practice of disappearing and reappearing throughout the years. It first appeared in 2002 as part of the Economic and Tax Relief Reconciliation Act of 2001, where it was put in place through the end of 2005. Then, in 2006, the Tax Relief and Health Care Act extended the benefit for tax years 2006 and 2007, and so began the tradition. Various bills brought the deduction back for 2 years at a time, and even last tax year we saw another extension for the year with the Tax Increase Prevention Act.
As detailed in IRS Publication 970, the Tuition and Fees Deduction is an above-the-line deduction of up to either $4,000 or $2,000, depending on your income, taken directly on Form 1040 and 1040A. Filers do not have to use a Schedule A to claim the deduction. If extended for 2015, the Tuition and Fees Deduction would be available if you paid tuition and required fees for yourself, your spouse, or your qualified dependent. As with all of the tax breaks for higher education, income restrictions and filing status stipulations apply. Parents interested in claiming any of the education tax breaks must file taxes as single, head of household or married filing jointly. The status “married filing separately” does not qualify.
The Tuition and Fees Deduction is just that—a deduction, not a tax credit. Credits tend to be more favorable than deductions because of the complexity involved with the United States tax law. A credit is a dollar for dollar reduction of the tax you are responsible to pay. If you have a $10,000 tax liability, and qualify for a $2,000 credit, you only owe the IRS $8,000. Pretty straight forward. But deductions are a bit trickier. Tax deductions reduce the amount of a taxpayer’s income which is subject to taxation. As a result, deductions reduce a taxpayer’s tax liability, but only by a percentage of the amount deducted, depending on the taxpayer’s highest marginal tax bracket. So, where a $2,000 credit will actually save you from paying $2,000 to the IRS, a $2,000 deduction may only net a $500 tax saving.
On the surface, the Tuition and Fees Deduction looks much like the other higher education tax credits or deductions, but there is one key difference for parents who split the college bill with others. Most of the education tax breaks follow similar logic regarding qualified education expenses that are paid by others: the student may claim expenses paid by others, parents may claim expenses paid by student, and, therefore, payments made by others can be claimed by parents. This holds true for the American Opportunity Credit, Lifetime Learning Credit, and Student Loan Interest Deduction. However, the Tuition and Fees Deduction does not allow parents to claim expenses paid for by the student, even if claimed as a dependent. In fact, if the student is claimed as a dependent and pays his or her own expenses through a UTMA/UGMA or student loan, then no one is allowed to take the deduction. Similar rules apply to parents who share custody. Many parents decide to alternate years of paying the bill or claiming the exemption for the student on federal tax returns, but if one parent pays expenses in a year that the other parent claims the child, no one can claim the deduction.
While the American Opportunity Credit tends to be the most beneficial tax break for parents of full-time college students in the first four years of their undergraduate degree program, the Tuition and Fees Deduction is ideal for those disqualified from the AOC: graduate students, high school students taking college courses, casual learners, and students who have not matriculated into a degree program or are not looking to improve a job skill. If you or your child fall into this category, keep an eye out for last minute legislation which may extend the Tuition and Fees Deduction for the 2015 tax year. If history is any guide, Congress may just breathe new life into this expired education tax break.