Introduction

Beginning in 2002, you may be able to deduct qualified tuition and related expenses paid during the year for yourself, your spouse, or a dependent. You cannot claim this deduction if your filing status is married filing separately or if another person is entitled to claim an exemption for you as a dependent on his or her tax return. The tuition and expenses must be for higher education, as explained later under Qualified Tuition and Related Expenses.

What is the tax benefit of the tuition and fees deduction?   The tuition and fees deduction can reduce the amount of your income subject to tax by up to $3,000.

This deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to taxpayers who cannot take either of the education credits because their income is too high.

The tuition and fees deduction will be available for 4 years, 2002 through 2005.

Table 4-1 summarizes the features of the tuition and fees deduction.

Do not rely on this table alone. Refer to the text for complete details.

Can You Take the Deduction?

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

Who Cannot Take the Deduction?

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

• Your filing status is married filing separately.
• Another person is entitled to 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 $65,000 ($130,000 if filing a joint return).
• 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.
• You or anyone else claims a Hope or lifetime learning credit in 2002 with respect to expenses of the student for whom the tuition and related expenses were paid.

Who Can Take the Deduction?

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

1. You pay qualified tuition and related expenses of higher education.
2. You pay the tuition and related expenses for an eligible student.
3. The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Qualified tuition and related expenses are defined below under What Expenses Qualify. Eligible students are defined later under Who Is an Eligible Student.

What Expenses Qualify?

The tuition and fees deduction is based on qualified tuition and related expenses you pay for yourself, your spouse, or a dependent for whom you are entitled to claim an exemption on your tax return. Generally, the deduction is allowed for qualified tuition and related expenses paid in 2002 in connection with enrollment at an institution of higher education during 2002 or for an academic period beginning in 2002 or in the first 3 months of 2003.

For example, if you paid $1,500 in December 2002 for qualified tuition for the Spring 2003 semester beginning in January 2003, you may be able to use that $1,500 in figuring your 2002 deduction.

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.

Payments with borrowed funds.   You can claim a deduction for qualified tuition and related expenses paid with the proceeds of a loan. You 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.

Qualified Tuition and Related Expenses

In general, qualified tuition and related expenses are tuition and fees 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 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.

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

In the following examples, assume that each student is an eligible student and each college or university an eligible educational institution.

Example 1.   Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified related expense.

Example 2.   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified related expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.

Example 3.   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified related expense.

No Double Benefit Allowed

You cannot:

• Deduct higher education tuition and fees if you deduct these expenses under any other provision of the law, for example, as a business expense,
• Deduct qualified higher education tuition and fees for a student on your income tax return if you or anyone else claims a Hope or lifetime learning credit for that same student in the same year,
• Deduct qualified tuition and related expenses that have been paid with tax-free distributions of earnings from a qualified tuition plan (QTP) or a Coverdell education savings account (ESA), or paid with tax-free interest on U.S. savings bonds (Form 8815), or
• Deduct qualified tuition and related expenses that have been paid with tax-free scholarship, grant, or employer-provided educational assistance. See the following section on Adjustments to Qualified Expenses.

Adjustments to Qualified Expenses

If you pay qualified higher education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. You must reduce the qualified expenses by the amount of any tax-free educational assistance you received.

Tax-free educational assistance could include:

• Scholarships,
• Pell grants,
• Employer-provided educational assistance,
• Veterans' educational assistance, and
• Any other nontaxable payments (other than gifts, bequests, or inheritances) received for education expenses.

Do not reduce the qualified expenses by amounts paid with the student's:

• Earnings,
• Loans,
• Gifts,
• Inheritances, and
• Personal savings.

Also, do not reduce the qualified expenses by any scholarship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualified tuition and related expenses.

Example 1.   In 2002, 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 scholarship is a qualified scholarship that is excludable from Jackie's income, and, for purposes of calculating the tuition and fees deduction, it must first reduce her tuition (her only qualified expense). The student loan is not considered tax-free educational assistance, so it does not reduce the qualified expenses. Therefore, Jackie is treated as having paid only $1,000 in qualified expenses ($3,000 tuition - $2,000 scholarship) to University X in 2002.

Example 2.   The facts are the same as in Example 1, except that Jackie reports her entire scholarship as income on her tax return. In this case, the scholarship is not treated as a qualified scholarship, so is allocated to expenses other than qualified expenses. Therefore, Jackie is treated as paying the entire $3,000 tuition to University X with other funds, the amount on which her tuition and fees deduction would be calculated.

Refunds.   Qualified tuition and related expenses do not include expenses for which you receive a refund. If you paid expenses in 2002, and you receive a refund of those expenses before you file your tax return for 2002, simply reduce the amount of the expenses paid by the amount of the refund received. If you receive the refund after you file your 2002 tax return, see Non-Itemized Deduction Recoveries, under Recoveries, in Publication 525.

Expenses That Do Not Qualify

Qualified tuition and related expenses do not include the cost of:

• Insurance,
• Medical expenses (including student health fees),
• Room and board,
• Transportation, or
• Similar personal, living, or family expenses.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance.

Qualified tuition and related 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.

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.

Who Can Claim a Dependent's Expenses?

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

1. Have paid the expenses, and
2. Claim an exemption for the student as a dependent.

For you to be able to deduct qualified expenses for your dependent, you must claim an exemption for that individual.

Expenses paid under divorce decree.   Qualified tuition and related expenses paid directly to an eligible educational institution for a student under a court-approved divorce decree are treated as paid by the student. Only the student would be eligible to take a tuition and fees deduction for that payment, and then only if no one else could claim an exemption for the student.

Expenses paid by others.   If someone other than you, your spouse, or your dependent (such as a relative or former spouse) makes a payment directly to an eligible educational institution to pay for an eligible student's qualified tuition and related expenses, the student is treated as receiving the payment from the other person. The student is then treated as paying the qualified tuition and related expenses to the institution and would be the only one eligible to take a deduction, provided no one else could claim an exemption for the student.

Example.   Ms. Baker makes a payment directly to an eligible educational institution in 2002 for her grandson Dan's qualified tuition and related expenses. For purposes of deducting tuition and fees, Dan is treated as receiving the money as a gift from his grandmother and, in turn, paying his own qualified tuition and related expenses.

If an exemption cannot be claimed for Dan on anyone else's tax return, only Dan can claim a tuition and fees deduction for his grandmother's payment. If someone else is eligible to claim an exemption for Dan, no one will be allowed a deduction for Ms. Baker's payment.

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