If you qualify, you can reduce your income on IRS Form 1040 by as much as $4,000. You can find more information about this deduction, around since 2010, on IRS Publication 970.
A taxpayer (“Payer”) can claim a tax deductions provided the Payer claims the child as an exemption on his or her tax return and, if filing jointly, has a Modified Adjusted Gross Income (MAGI) of less than $160,000. If the MAGI is less than $130,000, the filer can deduct up to $4,000 from income; between $130,000 and $160,000, the deduction drops to $2,000. There is no deduction for MAGI above $160,000. MAGI is the same as AGI after adding certain items back. The qualifying MAGI does not include the reduction posed by the possible tuition deduction.
This deduction applies only for tuition and certain fees. It does not include room and board, most books, travel, or other expenses, even though many of these would qualify for other types of educational benefits. Fees for the use of athletic facilities do not count, which is why colleges bill separately for them. Any fee that is deemed “mandatory” would qualify. For example, if every student has to pay the Student Activity Fee, then this would qualify. Books that are mandatory for attending the school would qualify; books the student needs for a given class are considered elective purchases and would not qualify.
You claim the deduction by submitting IRS Form 8917.
How much cash does this deduction put back into your pocket?
The financial impact of a tax deduction depends on the marginal tax rate for the taxpayer. For someone (A) who files taxes married jointly, which is what the above table shows, (B) has an MAGI below $130,000, and (C) claims the student (child, spouse, or self) as an exemption, the Payer could deduct up to the first $4,000 in qualified tuition and fees. That would mean the Payer at the 25% tax bracket would reduce his or her taxes by $1,975, combining both the exemption and the tuition deduction. If the Payer has two or more dependents attending college at the same time, he or she would list them on Form 8917, but find the most the Payer can deduct is $4,000 in any one year.
Having an MAGI between $130,000 and $160,000 places the Payer in the phaseout zone. This is where the Tuition deduction drops to $2,000. Depending on the marginal tax rate of the Payer, either 25% or 28%, the combined exemption and deduction would equate to a tax savings of $1,475 or $1,652 respectively.
If the Payer has an MAGI of $160,000 or greater, he or she would not be able to claim a Tuition and Fee deduction, although the exemption would still be worth more than $1,000, depending on the marginal tax rate. Adjusted Gross Incomes greater than $300,000 would see a whittling of the exemption at a rate of 2% for every additional $2,500 of income.
Not planning for college is still a plan. Thinking your child will win a scholarship, that loan interest rates will make college affordable, or that there will be some major tax savings is wishful thinking. There are tax-advantaged strategies available but these work only when there is enough time to make them worthwhile.