19.   Education- Related Adjustments

Introduction

This chapter discusses the education-related adjustment you can deduct in figuring your adjusted gross income.

This chapter covers the student loan interest deduction, tuition and fees deduction, and the deduction for educator expenses.

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Publication

  • 970 Tax Benefits for Education

Student Loan Interest Deduction

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 $75,000 ($155,000 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 2013. 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 program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
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 Defined

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan,

  • Paid or incurred within a reasonable period of time before or after you took out the loan, and

  • For education provided during an academic period when the student is an eligible student.

Loans from the following sources are not qualified student loans.

  • A related person.

  • A qualified employer plan.

Exceptions.   For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents.
  • An individual can be your dependent even if you are the dependent of another taxpayer.

  • An individual can be your dependent even if the individual files a joint return with a spouse.

  • 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 ($3,900 for 2013).

  

Reasonable period of time.   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

  Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.
  • The expenses relate to a specific academic period.

  • 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.

  If neither of the above situations applies, the reasonable period of time is determined based on all the relevant facts and circumstances.

Academic period.   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Eligible student.   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

Enrolled at least half-time.   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

  The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.

Related person.   You cannot deduct interest on a loan you get from a related person. Related persons include:
  • Your spouse,

  • Your brothers and sisters,

  • Your half brothers and half sisters,

  • Your ancestors (parents, grandparents, etc.),

  • Your lineal descendants (children, grandchildren, etc.), and

  • Certain corporations, partnerships, trusts, and exempt organizations.

Qualified employer plan.   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.

Qualified Education Expenses

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.

  • Tuition and fees.

  • Room and board.

  • Books, supplies, and equipment.

  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than:

  • 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

  • If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Eligible educational institution.   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

  Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

  For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.

  An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility.

  
The educational institution should be able to tell you if it is an eligible educational institution.

Adjustments to qualified education expenses.   You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). See chapter 4 of Publication 970 for details.

Include as Interest

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.

Loan origination fee.   In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, the fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan.

Capitalized interest.    This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan.

Interest on revolving lines of credit.   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses , earlier.

Interest on refinanced student loans.   This includes interest on both:
  • Consolidated loans—loans used to refinance more than one student loan of the same borrower, and

  • Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan.

If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan.

Voluntary interest payments.   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status.

Do Not Include as Interest

You cannot claim a student loan interest deduction for any of the following items.

  • Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments.

  • Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.

  • 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.

Can You Claim the Deduction

Generally, you can claim the deduction if all of the following requirements are met.

  • Your filing status is any filing status except married filing separately.

  • No one else is claiming an exemption for you on his or her tax return.

  • You are legally obligated to pay interest on a qualified student loan.

  • You paid interest on a qualified student loan.

Interest paid by others.   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. See chapter 4 of Publication 970 for more information.

No Double Benefit Allowed

You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

How Much Can You Deduct

Your student loan interest deduction for 2013 is generally the smaller of:

  • $2,500, or

  • The interest you paid in 2013.

However, the amount determined above is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). For details on figuring your MAGI, see chapter 4 of Publication 970.

How Do You Figure the Deduction

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 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014.

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.

Tuition and Fees Deduction

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.

Can You Claim the Deduction

The following rules will help you determine if you can claim the tuition and fees deduction.

Who Can Claim the Deduction

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.

  1. You paid qualified education expenses of higher education in 2013 for academic periods beginning in 2013 and those beginning in the first three months of 2014.

  2. You paid the education expenses for an eligible student.

  3. 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 .

Who Cannot Claim the Deduction

You cannot claim the tuition and fees deduction if any of the following apply.

  • Your filing status is married filing separately.

  • 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.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien 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.

  • You or anyone else claims an American opportunity or lifetime learning credit in 2013 with respect to expenses of the student for whom the qualified education expenses were paid. However, a state tax credit will not disqualify you from claiming a tuition and fees deduction.

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
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.
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.

What Expenses Qualify

The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period (defined earlier under Student Loan Interest Deduction ) beginning in 2013 or in the first 3 months of 2014.

Payments with borrowed funds.   You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

Student withdraws from class(es).   You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws.

Qualified Education Expenses

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.

Eligible educational institution.   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

  Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

Academic period.    An academic period is any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible educational institution. If an eligible educational institution uses credit hours and does not have academic terms, each payment period may be treated as an academic period.

Related expenses.   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses for the tuition and fees deduction only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Prepaid expenses.   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring the tuition and fees deduction. See Academic period, earlier. For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring the tuition and fees deduction for 2013 only if you meet all the other requirements.

  
You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 tuition and fees deduction.

No Double Benefit Allowed

You cannot do any of the following.

  • Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense.

  • Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year.

  • 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 chapter 8 (QTP) of Publication 970.

  • 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.

  • Deduct qualified education expenses that have been paid with tax-free educational assistance such as a scholarship, grant, or employer-provided educational assistance. See Adjustments to qualified education expenses, later.

Adjustments to qualified education expenses.   For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.

Tax-free educational assistance.   For tax-free educational assistance you received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance to that academic period. See Academic period, earlier.

  This includes:
  • The tax-free part of scholarships and fellowships, including Pell grants (see chapter 1 of Publication 970),

  • The tax-free part of any employer-provided educational assistance (see chapter 11 of Publication 970),

  • Veterans' educational assistance (see chapter 1 of Publication 970), and

  • Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Generally, any scholarship or fellowship you receive is treated as tax-free educational assistance. However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent you include it in gross income (if you are required to file a tax return) for the year the scholarship or fellowship is received and either:

  • The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1.

  • The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1.

You may be able to increase the combined value of your tuition and fees deduction and certain educational assistance if you include some or all of the educational assistance in income in the year it is received. For details, see Adjustments to Qualified Education Expenses in chapter 6 of Pub. 970.

Some tax-free educational assistance received in 2013 may be treated as a refund of qualified education expenses paid in 2013. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013).

If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later.

Refunds.   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or may require you to include some or all of the refund in your gross income for the year the refund is received. See chapter 6 of Pub. 970 for more information. Some tax-free educational assistance received after 2013 may be treated as a refund. See Tax-free educational assistance, earlier.

Refunds received in 2013.    For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013.

Refunds received after 2013 but before your income tax return is filed.   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund.

Refunds received after 2013 and after your income tax return is filed.   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received after you file your 2013 income tax return, you may need to include some or all of the refund in your gross income for the year the refund is received. See chapter 6 of Pub. 970 for more information.

Coordination with Coverdell education savings accounts and qualified tuition programs.    Reduce your qualified education expenses by any qualified education expenses used to figure the exclusion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or 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.

Amounts that do not reduce qualified education expenses.   Do not reduce qualified education expenses by amounts paid with funds the student receives as:
  • Payment for services, such as wages,

  • A loan,

  • A gift,

  • An inheritance, or

  • A withdrawal from the student's personal savings.

  Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.
  • The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses.

  • The use of the money is not restricted.

Expenses That Do Not Qualify

Qualified education expenses do not include amounts paid for:

  • Insurance,

  • Medical expenses (including student health fees),

  • Room and board,

  • Transportation, or

  • 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.

Sports, games, hobbies, and noncredit courses.   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.

Comprehensive or bundled fees.   Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive, or do not have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See How Do You Figure the Deduction , later, for more information about Form 1098-T.

Who Is an Eligible Student

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).

Who Can Claim a Dependent's Expenses

Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:

  • Have paid the expenses, and

  • Claim an exemption for the student as a dependent.

Table 19-3 summarizes who can claim the deduction.

How Much Can You Deduct

The maximum tuition and fees deduction in 2013 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.

How Do You Figure the Deduction

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 January 31, 2014.

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 you paid all qualified education expenses no one is allowed to take a deduction.
do not claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction.

Educator Expenses

If you were an eligible educator in 2013, you can deduct on Form 1040, line 23, or Form 1040A, line 16, up to $250 of qualified expenses you paid in 2013. 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 on Form 1040, line 23, or Form 1040A, line 16. You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A (Form 1040), line 21.

Eligible educator.   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.

Qualified expenses.   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary.

  Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education.

  You must reduce your qualified expenses by the following amounts.
  • Excludable U.S. series EE and I savings bond interest from Form 8815. See Figuring the Tax-Free Amount in chapter 10 of Publication 970.

  • Nontaxable qualified tuition program earnings or distributions. See Figuring the Taxable Portion of a Distribution in chapter 8 of Publication 970.

  • Nontaxable distribution of earnings from a Coverdell education savings account. See Figuring the Taxable Portion of a Distribution in chapter 7 of Publication 970.

  • Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2.


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