Educational Expenses

1
Educational Expenses

• Amanda Beavers
• Eddie Bradford
• Nichole Hartfield

2
Table of Contents

• Suggested Reading
• Introduction
• Qualified Tuition and Related Expenses Deduction
• Student Loan Interest Deduction
• Hope Scholarship Credit
• Lifetime Learning Credit
• Additional Tax Relief Options
• Summary
• Chart Illustration
• Side by Side Comparison
• Additional Readings
• Appendix

3
Suggested Reading
Please click on the link above for a related
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4
Tax Relief for Higher Educational Expenses
5
Introduction to Educational Expenses

• The Hope and Lifetime Learning tax credits and
  the student loan interest deduction were created
  as a part of the Taxpayer Relief Act of 1997,
  enacted on August 5, 1997.
• These benefits were added to ease the burden of
  families and students paying for postsecondary
  education, especially middle-class families who
  may not qualify for need-based aid but may still
  be struggling with the costs of higher education.
• The Economic Growth and Tax Reconciliation Act of
  2001 added the tuition and fees deduction and
  raised the applicable income limits for existing
  benefits, expanding eligibility for the Hope and
  Lifetime Learning tax credits and the student
  loan interest deduction to include a larger
  number of Americans.
• Source http//www.tgslc.org/resources/history.cfm

6
Qualified Tuition and Related Expenses Deduction
7
Qualified Tuition and Related Expenses Deduction

• What expenses are considered eligible?
• Tuition and fees required for the enrollment and
  attendance of the following parties the
  taxpayer, the taxpayers spouse, or any
  dependent(1) of the taxpayer at an eligible
  educational institution.(2)

8
Qualified Tuition and Related Expenses Deduction

• What is considered an eligible educational
  institution?
• Any college, university, vocational school, or
  other postsecondary educational institution,
  eligible to participate in a federal financial
  aid program administered by the Department of
  Education.(3)

9
Qualified Tuition and Related Expenses Deduction

• Who is considered an eligible student?
• A student who has either a high school diploma or
  a General Educational Development (GED)
  credential, and who is enrolled in one or more
  courses at an eligible educational
  institution.(4)

10
Qualified Tuition and Related Expenses Deduction
Miscellaneous Fees

• What fees can qualify as related expenses?
• General Test Questions
• Is this paid to an eligible institution?
• Is this necessary for the students enrollment in
  that institution?
• Books, Supplies and Equipment(5)
• Non-academic fees(6)

11
Qualified Tuition and Related Expenses Deduction
What costs are NOT included?

• Personal expenses(7) room and board, insurance
  and medical expenses, transportation, and similar
  living expenses regardless of whether the fee is
  required by the institution
• Hobby Courses(8) sports, games and hobbies or
  any non-credit course unless it is a part of the
  degree program

12
Qualified Tuition and Related Expenses Deduction
Dollar Limitations

• In 2002 2003, if AGI is 65,000 (or
  130,000 if joint return), the taxpayer can
  deduct 3,000 from adjusted gross income(9)
• In 2004 2005, if AGI is 65,000 (or
  130,000 if joint return), the taxpayer can
  deduct 4,000 from adjusted gross income(10)
• In 2004 2005, if AGI is 80,000 (or
  160,000 if joint return), the taxpayer can
  deduct 2,000 from adjusted gross income(11)
• Taxpayers with AGI gt 80,000 ( or gt 160,000 if
  joint return), are not eligible for this
  deduction(12)
• This deduction is eligible for four years only
  (2002-2005)! This will be the last year that a
  deduction of this type will be allowed.(13)

13
Qualified Tuition and Related Expenses Deduction
Adjustments

• An educational expense deduction shall be reduced
  by the following
• a qualified scholarship that is excluded from
  gross income(14)
• an educational expense allowance(15)
• any other payment for an individuals enrollment
  at an eligible school, which is excluded from
  gross income(16)

14
Qualified Tuition and Related Expenses
Example(17)

• In 2004, Jackie paid 3,000 for tuition and
  5,000 for room and board at University X. The
  university did not require her to pay any fees in
  addition to her tuition in order to enroll in or
  attend classes. To help pay these costs, she was
  awarded a 2,000 scholarship and a 4,000 student
  loan.
• The terms of the scholarship state that it may
  be used to pay any of Jackie's college expenses.
  Because she applied it toward her tuition, the
  scholarship is tax free. Therefore, for purposes
  of figuring the tuition and fees deduction, she
  must first use the 2,000 scholarship to reduce
  her tuition (her only qualified education
  expense). The student loan is not tax-free
  educational assistance, so she does not use it to
  reduce her qualified expenses. Jackie is treated
  as having paid 1,000 in qualified education
  expenses (3,000 tuition 2,000 scholarship) in
  2004.

15
Student Loan Interest Deduction
16
Student Loan Interest Deduction General
Information(18)

• Can be taken as an adjustment to taxpayers
  income if
• Modified Adjusted Gross Income is less than
  65,000 (or 130,000 if filing a joint return)
• Loan deemed a qualified student loan
• Loan was used for an eligible student

17
Student Loan Interest Deduction General
Information(18)

• Maximum Benefit 2,500 reduction in income per
  taxable year
• Loan Qualifications
• Must have been used for qualified education
  expenses
• Cannot be from a related party or made under a
  qualified employer plan
• Time Limit Interest is deductible during the
  remaining period of the student loan

18
Student Loan Interest Deduction General
Information(18)

• Student Qualifications
• Loan was used for taxpayer, taxpayers spouse or
  qualified dependent
• Student must be enrolled at least half-time in a
  degree program

19
Student Loan Interest Deduction

• Qualified Education Expenses defined as(18)
• Tuition and fees
• Room and Board
• Determined by institution and included in cost of
  attendance
• Housing must be owned and operated by the
  eligible education institution
• Books, Supplies and Equipment
• Other Miscellaneous Expenses
• Transportation

20
Student Loan Interest Deduction History(18)

• Year You Made Interest
• Payments
• Before
• 1998 2001
• 2002 and later

• Interest Deduction Allowed
• No deduction allowed.
• Interest paid during the first 60 months that
  interest payments are required on the student
  loan.
• All interest paid on student loan during year,
  both required and voluntary payments.

21
Student Loan Interest Deduction Example(18)

• The payments on Roger's student loan were
  scheduled to begin in June 2003, 6 months after
  he graduated from college. He began making
  payments as required. In September 2004, Roger
  enrolled in graduate school on a full-time basis.
  He applied for and was granted deferment of his
  loan payments while in graduate school. Wanting
  to pay down his student loan as much as possible,
  he made loan payments in October and November,
  2004.
• Even though these were voluntary (not required)
  payments, Roger can deduct the interest paid in
  October and November.

22
Hope ScholarshipCredit
23
Hope Scholarship Credit

• Who can qualify for this credit?
• A taxpayer who has paid qualified education
  expenses of higher education.
• A taxpayer who has paid qualified education
  expenses for an eligible student.
• If the eligible student is either yourself, your
  spouse or a dependent for who you are claiming an
  exemption for on your current year tax return.

24
Hope Scholarship Credit

• Who CANNOT qualify for this credit?
• A taxpayer whose filing status is married filing
  separately.
• A taxpayer who has been claimed as a dependant on
  another return for the current tax year.
• If the taxpayers modified adjusted gross income
  (MAGI) for 2005 is gt 53,000 (107,000 in the
  case of a joint return).(19)
• If the taxpayer claims the lifetime learning
  credit or tuition and fees deduction for the same
  eligible student for the current tax year.(20)

25
Hope Scholarship Credit

• What additional criteria exist to qualify as an
  eligible student for this credit?
• A taxpayer who did not have expenses that were
  used towards a Hope Credit in any 2 previous tax
  years.(21)
• A taxpayer who has not completed the first two
  years of postsecondary education.(22)

26
Hope Scholarship Credit Calculation

• Per Taxable Year (up to two taxable years)
• 100 of the first 1,000 of qualified education
  expenses paid for the eligible student.(23)
• 50 of the next 1,000 of qualified education
  expenses paid for the same student.(24)

27
Hope Scholarship Credit Example(25)

• In 1999, Taxpayer A has two dependents, B and C,
  both of whom are eligible students. Taxpayer A
  pays 1,600 in qualified tuition and related
  expenses for dependent B to attend a community
  college. Taxpayer A pays 5,000 in qualified
  tuition and related expenses for dependent C to
  attend University X.
• Taxpayer A may claim a Hope Scholarship Credit
  of 1,300 (1,000 (.50 600)) for dependent
  B, and the maximum 1,500 Hope Scholarship Credit
  for dependent C, for a total Hope Scholarship
  Credit of 2,800.

28
Lifetime Learning Credit
29
Lifetime Learning Credit Comparison to the Hope
Credit

• The eligibility requirements of the lifetime
  learning credit are the same as the Hope
  Scholarship Credit.
• A taxpayer cannot claim this credit in addition
  to Hope Scholarship Credit in the taxable year
  for the same student.(26)
• There is not a year limit on how many years that
  the lifetime credit can be taken.

30
Lifetime Learning Credit Comparison to the Hope
Credit

• The lifetime credit is available for one or more
  eligible courses taken at an eligible education
  institution.
• The lifetime credit is available for all
  postsecondary education as well as courses taken
  to acquire or improve job skills.

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Lifetime Learning Credit Calculation

• Per Taxable Year
• 20 of qualified education expenses paid by the
  taxpayer during the taxable year up to
  10,000(27)
• 10,000 in total qualified education expenses
  relates to taxable years beginning January 1,
  2003 and 5,000 in previous years(27)

32
Lifetime Learning Credit Example(28)

• Bruce and Toni Harper are married and file a
  joint tax return. For 2004, their MAGI is
  75,000. Toni is attending a local college (an
  eligible educational institution) to earn credits
  toward a degree in nursing. She already has a
  bachelor's degree in history and wants to become
  a nurse. In August 2004, Toni paid 6,000 of
  qualified education expenses for her Fall 2004
  semester.
• Bruce and Toni can claim a 1,200 (20 6,000)
  lifetime learning credit on their 2004 joint tax
  return.

33
Hope/Lifetime Credits Treatment of Dependents
Expenses(29)

• IF you...
• claim an exemption on your tax return for a
  dependent who is an eligible student
• THEN only
• you can claim the Hope or Lifetime credit based
  on that dependent's expenses. The dependent
  cannot claim the credit.

• IF you...
• do not claim an exemption on your tax return for
  a dependent who is an eligible student (even if
  entitled to the exemption)
• THEN only
• the dependent can claim the Hope or Lifetime
  credit. You cannot claim the credit based on this
  dependent's expenses.

34
Hope vs. Lifetime Summary(29)

• Hope Scholarship Credit
• Up to 1,500 per eligible student
• Available for only 2 years per student
• Must be pursuing a degree

• Lifetime Learning Credit
• Up to 2,000 per return
• Does not have a year requirement
• Do not need to be pursuing a degree

35
Hope vs. Lifetime Summary(29)

• Hope Scholarship Credit
• Must be enrolled at least half time for at least
  one period during the year
• No felony drug conviction on students record

• Lifetime Learning Credit
• Available for one or more courses
• Felony drug conviction rule does not apply

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Additional Tax Relief Options for Educational
Expenses

• Employer Tuition Reimbursement Program allows a
  company to reimburse an employee up to 5,250 per
  year tax free.
• Early Withdrawals from IRAs the 10 penalty tax
  can be avoided if used to pay for qualified
  higher educational expenses.
• 529 Plan

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Summary - How to maximize your education tax
benefits

• Since the Hope Scholarship is a tax credit of at
  least 50 of the amount of the expenses, it is
  better than the tax deductions and exclusions
  from income.
• Since the Lifetime Learning tax credit is 20 of
  the amount of the expenses, whether it is better
  than tax deductions and exclusions from income
  depends on your tax bracket. If your tax bracket
  is less than 20, the Lifetime Learning tax
  credit is better than the tax deductions and
  exclusions from income.
• However, the tuition and fees deduction is taken
  as an above-the-line exclusion from income. Since
  this reduces the AGI, it can potentially make you
  eligible for additional financial aid next year.
  If that aid is in the form of grants instead of
  loans, it can potentially make the tuition and
  fees deduction more attractive than the Hope
  Scholarship or Lifetime Learning tax credit.
• If you can take either the Hope Scholarship or
  the Lifetime Learning tax credits for a student,
  prefer the Hope Scholarship.
• Source http//www.finaid.org/savings/taxbenefitco
  ordination.phtml

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Chart Illustration

• The following chart illustrates the coordination
  restrictions by assigning each program to a
  column and a row, and placing a letter at each
  intersection to indicate the nature of any
  coordination restrictions. If the letter 'X' is
  used, it indicates that the same expenses may not
  be used as the basis for both programs. If the
  letter 'C' is used, it indicates that the
  programs may not be used for the same child
  during the same year. If the intersection is
  blank, it means that there are no coordination
  restrictions.
• Source http//www.finaid.org/savings/taxbenefitco
  ordination.phtml

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  529 ESA Hope Lifetime Bonds Tuition Student Tax-Free
  529 ESA Hope Lifetime Bonds Deduction Loan Educ.
  529 ESA Hope Lifetime Bonds   Interest Assist.
  529 ESA Hope Lifetime Bonds   Deduction  
529   X X X   X    
ESA X   X X X X    
Hope X X   C X C   X
Lifetime X X C   X C   X
Bonds   X X X   X   X
Tuition X X C C X     X
Deduction X X C C X     X
Student                
Loan                
Interest                
Deduction                
Tax-Free     X X X X    
Educ.     X X X X    
Assist.     X X X X    
40
Side by Side Comparison(30)
Program Amount Qualified Income Other
Name Amount Expenses Phaseouts Constraints
529 Plans Amount of distribution is not taxed. Higher education expenses. Includes room and board for students enrolled at least half-time (e.g., actual charges from school, or school's official budget for students living off-campus but not at home). None. None.
Coverdell ESA Amount of distribution is not taxed. Higher education expenses including tuition and fees, books, supplies, equipment, and room and board. Room and board are limited to the school's actual charges for students living on campus and 2,500 for students living off campus and not at home. Certain elementary and secondary school expenses may be included. On contributions only. Contributions limited to 2,000 per beneficiary. Contributions phased out between 95,000 and 110,000 (single filers) and 190,000 and 220,000 (married filing jointly). Contributions end at age 18 and must withdraw assets by age 30, unless special needs.
41
Hope Scholarship 1,500 tax credit per student (100 of first 1,000, 50 of next 1,000). Capped at amount of tax (not refundable). Higher education expenses, limited to tuition and fees required for enrollment or attendance. Does not include room and board. Single filers 41,000 to 51,000 Married filing jointly 82,000 to 102,000. First two years of postsecondary education. Must be enrolled at least half-time in a degree program. No felony drug convictions. Must be able to claim an exemption for the student on your income tax return.
Lifetime Learning 1,000 tax credit per tax return (20 of the first 5,000 paid for all eligible students). Capped at amount of tax (not refundable). Higher education expenses, limited to tuition and fees for courses. Single filers 41,000 to 51,000 Married filing jointly 82,000 to 102,000. Available for all years of postsecondary education. Does not need to be pursuing a degree. Must be able to claim an exemption for the student on your income tax return.
Savings Bonds Interest on redeemed bonds excluded from income. Higher education expenses limited to tuition and fees. Does not include room and board or non-degree courses. Single filers 55,750 to 70,750 Married filing jointly 83,650 to 113,650 (2001 figures) None.
Tuition Deduction 3,000 in 2002 and 2003, 4,000 in 2004 and 2005. Tuition Single filers 65,000 to 80,000 Married filing jointly 130,000 to 160,000 Must be able to claim an exemption for the student on your income tax return. Adjustment to income, so do not need to itemize deductions.
Interest Deduction 2,500 tax deduction Amount of student loan interest paid for higher education expenses. Higher education expenses include tuition, fees, books, supplies, equipment, room and board, transportation, etc. Single filers 40,000 to 55,000 Married filing jointly 60,000 to 75,000. Adjustment to income, so do not need to itemize deductions. Student must have been enrolled at least half-time in a degree program.
Tax-Free 5,250 in employer-paid benefits not taxed. Undergraduate and graduate courses, including tuition, fees, books, supplies and equipment. Does not have to be for work-related courses. Does not include courses involving sports, games or hobbies unless required as part of a degree program or related to business of employer. None. Excess also tax free if working condition fringe benefit (i.e., if paid by employee deductible as employee business expense).
Employer 5,250 in employer-paid benefits not taxed. Undergraduate and graduate courses, including tuition, fees, books, supplies and equipment. Does not have to be for work-related courses. Does not include courses involving sports, games or hobbies unless required as part of a degree program or related to business of employer. None. Excess also tax free if working condition fringe benefit (i.e., if paid by employee deductible as employee business expense).
Educational 5,250 in employer-paid benefits not taxed. Undergraduate and graduate courses, including tuition, fees, books, supplies and equipment. Does not have to be for work-related courses. Does not include courses involving sports, games or hobbies unless required as part of a degree program or related to business of employer. None. Excess also tax free if working condition fringe benefit (i.e., if paid by employee deductible as employee business expense).
Assistance 5,250 in employer-paid benefits not taxed. Undergraduate and graduate courses, including tuition, fees, books, supplies and equipment. Does not have to be for work-related courses. Does not include courses involving sports, games or hobbies unless required as part of a degree program or related to business of employer. None. Excess also tax free if working condition fringe benefit (i.e., if paid by employee deductible as employee business expense).
42
Additional Readings

• Here are a few links to additional sources
  related to this topic
• http//www.finaid.org/savings/taxbenefitcoordinati
  on.phtml
• http//www.turbotax.com/articles/DeductionforHighe
  rEducationExpenses.html

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Appendix

• (1) IRC 25A(g)(3)(B) qualified tuition and
  related expenses paid by a dependent is treated
  as being paid by the taxpayer
• (2) IRC 25A(f)
• (3) Reg. 1.25A-2(b)
• (4) IRC 25A(b)(3)
• (5) Reg. 1.25A-2(d)(2)(ii) must be used in a
  particular course of study and are paid to the
  eligible educational institution
• (6) Reg. 1.25A-2(d)(2)(iii) must be paid to the
  eligible educational institution for the
  enrollment or attendance of the student

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Appendix cont.

• (7)Reg. 1.25A-2(d)(3) Qualified tuition and
  related expenses do not include the costs of room
  and board, insurance, medical expenses (including
  student health fees), transportation, and similar
  personal, living, or family expenses, regardless
  of whether the fee must be paid to the eligible
  educational institution for the enrollment or
  attendance of the student at the institution.
• (8)Reg. 1.25A-2(d)(5) Qualified tuition and
  related expenses do not include expenses that
  relate to any course of instruction or other
  education that involves sports, games, or
  hobbies, or any noncredit course, unless the
  course or other education is part of the
  student's degree program, or in the case of the
  Lifetime Learning Credit, the student takes the
  course to acquire or improve job skills.
• (9)IRC 222(b)(2)(A)(i)
• (10)IRC 222(b)(2)(B)(i)
• (11)IRC 222(b)(2)(B)(ii)

45
Appendix cont.

• (12)IRC 222(b)(2)(B)(iii)
• (13)IRS Publication 970 Chapter 6 The tuition
  and fees deduction is available for 4 years, 2002
  through 2005.
• (14)IRC 25A(g)(2)(A)
• (15)IRC 25A(g)(2)(B)
• (16) IRC 25A(g)(2)(C)
• (17)Example taken from IRS Publication 970
  Chapter 6

46
Appendix cont.

• (18) Information and example taken from IRS
  Publication 970 Chapter 4
• (19) http//www.savingforcollege.com/tutorial101/f
  ederal_tax_incentives_to_education.php
• (20)IRS Publication 970 Chapter 2
• (21)IRC 25A(b)(2)(A) CREDIT ALLOWED ONLY FOR 2
  TAXABLE YEARS. An election to have this section
  apply with respect to any eligible student for
  purposes of the Hope Scholarship Credit under
  subsection (a)(1) may not be made for any taxable
  year if such an election (by the taxpayer or any
  other individual) is in effect with respect to
  such student for any 2 prior taxable years.
• (22)I.R.C. 25A(b)(2)(C) CREDIT ALLOWED ONLY
  FOR FIRST 2 YEARS OF POSTSECONDARY EDUCATION.
  --The Hope Scholarship Credit under subsection
  (a)(1) shall not be allowed for a taxable year
  with respect to the qualified tuition and related
  expenses of an eligible student if the student
  has completed (before the beginning of such
  taxable year) the first 2 years of postsecondary
  education at an eligible educational
  institution.

47
Appendix cont.

• (23)IRC 25A(b)(1)(A)
• (24)IRC 25A(b)(1)(B)
• (25)Example taken from Reg. 1.25A-2
• (26)IRC 25A(c)(2)(A) COORDINATION WITH HOPE
  SCHOLARSHIP. --The qualified tuition and related
  expenses with respect to an individual who is an
  eligible student for whom a Hope Scholarship
  Credit under subsection (a)(1) is allowed for the
  taxable year shall not be taken into account
  under this subsection.
• (27) IRC 25A(c)(1)
• (28)Example taken from IRS Publication 970
  Chapter 3

48
Appendix cont.

• (29) Tables from IRS Publication 970
• Chapters 3-4
• (30) Chart taken from http//www.finaid.org/saving
  s/taxbenefitcoordination.phtml