College tuition deduction

msmagooJanuary 8, 2006

My daughter just finished her 1st semester in college, I usually prepare my own taxes, what deduction/form do i use to deduct her tuition? Can I deduct the cost of her books as well, also she has a gov't student loan can I deduct that as well. The gov't pays the interest until she graduates. Thanks in advance

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There are 2 education credits, the Hope Credit and the Lifetime Learning Credit, one Tuition and Fees Deduction, and one deduction for student loan interest.

In general (there are exceptions), you can use only tuition and required fees to qualify for education credits and the tuition and fees deductions. If the books can only be purchased through the instutition, then the cost of the books can be used also. College bookstores are normally not run by the institution so most books cannot be used to claim the credit. The one my daughter buys books from is run by Barnes and Noble. The best example of books that qualify for the credit or deduction I can give is a school that writes its own books and those books can only be purchased from that school (there is no secondary market or other source outside of the school).

The Hope Credit is available for only 2 years for each student. It can be taken any year that the student is a freshman or sophmore on December 31st. It cannot be taken for more than 2 years for any single student. It is a maximum credit of $1500 per STUDENT

The Lifetime Learning credit can be taken at anytime. It is a maximum credit of $2000 per RETURN.

The IRS will not let you claim both the Hope Credit and Lifetime Learning credit for the same student in a year, but you can claim both credits if you have more than one student (use a different student for each credit).

Both of the credits phase out based on your filing status and AGI.

The tuition and fee deduction phases out at a higher AGI than the Credits. It cannot be used for a student for which you are claiming a credit. It is limited to a maximum adjustment of $4000 of tuition and fees (again no books).

Now on to student loan interest deduction, You can only claim interest on a dependent's student loan that you were legally obligated to pay and actually paid yourself. So based on the information you gave in your post, you can't claim an interest deduction.

Below is a link to the IRS pub on tax benefits for education.

I'd be happy to answer any more questions you have. Good luck


Here is a link that might be useful: Tax benefits for education

    Bookmark   January 8, 2006 at 9:04PM
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I'd just like to add that the popular tax software programs (I use TaxCut) do an excellent job of sorting this out for you, as well as other more complex tax questions. If you're getting into this type of credit and deduction situation and not using tax software, you're working too hard, and could be costing yourself money. And $30 is cheaper that going to a tax preparer. Just my .02. Steve

    Bookmark   January 9, 2006 at 3:12PM
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steve, you are right that spending $30 is cheaper than going to a professional tax preparer. Buying software does not eliminate the need for the taxpayer preparing his/her own return to do some research in order to correctly prepare his own return and take advantage of all of the potential ways to save taxes. Think about how much your time is worth and how long it could take you to learn and understand tax law. Add that figure to the $30 cost of software.

If you are willing to do the research, spend the time to learn taxes and consider that your time is fairly low in value, I encourage you to do your return yourself. If you want to spend a minimum of time and let the computer do all the work, in my humble opinion, go to a tax professional. That tax professional just might save you the cost of having your taxes prepared by increasing your refund simply because they know tax laws that can save you money.

    Bookmark   January 9, 2006 at 3:20PM
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Does that mean i can take the Hope Credit & a tuition deduction as well? I know that I can deduct student loan interest, but for example, let's say that the tuition is $4000, she has a stafford loan for S2000 and we pay $2000, can we deduct $4000 since that is the actual tuition($2000 borrowed funds & $2000 from savings). She is a freshman so should I use the Hope credit? Thanks for your help!

    Bookmark   January 9, 2006 at 7:37PM
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I just went back and reread my previous post thinking I wasn't clear. You CANNOT take a credit and a tuition deduction for the same student. If you have 2 students, then you can take either the Hope Credit or Lifetime Learning Credit for one and the tuition deduction for the other. You have to work your tax return once taking taking the credit and once taking the deduction to see which one is the best for you.

Based on your individual circumstances, it is possible that taking the tuition and fees deduction may be more beneficial to you than taking a credit. The deduction lowers your AGI. A lower AGI impacts itemized medical expense deductions, employee business expense deductions and many other things. I have done many tax returns where the deduction was more beneficial than the credit. The only way to tell is to work the return both ways.

The hope credit based on $4000 in tuition would work out to a maximum of $1500 (100% of the first $1000 and 50% of the second $1000). The Lifetime Learning Credit would work out to $800 (20% of $4000).

I do not believe that you can take the student loan interest deduction based on the information you gave earlier. Typically, the loan is in the student's name which means she is the one legally obligated to pay the interest, not you. One of the requirements of that particular deduction is that you, the taxpayer, is legally obligated to pay the interest.

Good luck


    Bookmark   January 9, 2006 at 10:04PM
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Joan, Thanks for the valuable information presented here and in the other thread about using home equity to pay off credit card debt. Your presentations have been clear and convincing. I am assuming that you may be tax professional or similar. I don't mean to step on your toes and steer people away from the profession. I've found the tax software to be immensely helpful in my moderately complex (??) tax returns. Going to a live person may have saved more money, but I'll never know unless I do a side by side comparison. I was really just letting the OP know that she can use the software to figure out the best way to go on the college deductions and credits. I went through that very situation last year and TaxCut seemed quite proficient. Thanks, Steve

    Bookmark   January 10, 2006 at 8:08AM
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Steve, I am not trying to offend anyone here, just to present "the other side". There are many many people who can do their tax return correctly. But I've seen too many people who can't because they simply use the software for data entry without really understanding what they are doing. The point I was trying to make was it isn't enough to just buy and use the software, you have to do some research too also to be sure you are using the software correctly.

Have fun


    Bookmark   January 10, 2006 at 9:35AM
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Having been a personal financial advisor for over 20 years, I've called a number of tax preparers to ask whether, when they've finished doing a client's return, whether there are many who ask how they may rearrange their affairs slightly next year in order to reduce their tax load.

Almost all have said that very few ever ask such a question.

I say that they've got to be kidding - that when I have someone prepare my tax return, when they've finished they know quite a bit about my financial affairs.

Seems to me that if I don't ask for some suggestions as to how to reduce, defer, etc. my tax load, I'm being *very* *stupid*.

At very least - letting a golden opportunity go by unused.

I hope that those of you who read this and have professional tax preparers do your tax return will take advantage of that opportunity.

I can't believe how many Canadians - even some bank employees - don't know that when a Canadian taxpayer who owns stocks in a Canadian corporation that pays dividends prepares his/her tax return, they pay a much lower rate of tax on those dividends than on employment income, the resulting pension (apart from a small deductible) or interest income. All of the latter (the kind of income that most people earn, by the way) are taxed at (guess what?) top rate!

So much for our Federal would-be Prime Ministers in their debate last night vying with one another as to who wants to make the most tax cuts.

Our neighbours to the south have been making large tax cuts - while running huge annual deficits. What kind of sense that makes I have yet to understand.

Good wishes for a wonderful New Year.

ole joyful

    Bookmark   January 10, 2006 at 4:31PM
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Sorry to be such a dummy but here's another question.
The student loan is in my daughter's name only, does this mean that I can't deduct that portion of the tuition? If that is so, she worked a summer job last year so she will file a tax return(EZ) can she deduct anything? We still list her as a dependant on our returns. Thanks again!

    Bookmark   January 10, 2006 at 6:16PM
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Education credits have a couple of twists when deciding who can take the credit and who it will benefit most. You can use the tuition that was paid by the loan for the education credit if you can and do claim your daughter as a dependent. If you do not claim her even though you qualify to claim her, she can claim the credit based on the full $4000 paid in tuition. However, if she qualifies as your dependent, she cannot claim herself. In other words no one claims her. Are you throughly confused now? I hope not, if you are, please ask questions.

Basically, the only way to figure out how to minimize your and your daughter's tax liabilities is to work both your return and her return using all possible scenarios. Software makes this much easier than using paper forms, pencil and a calculator.

Congress cleverly (?) changed the definition of a qualifying child for 2005. You need to be sure that your daugher does not pay more than half of her support. The student loans she takes out count as support that she provides along with whatever she earns and spends on herself. Think about all the money that is spent to support her during a typical year (housing, food, clothes, medical, transportation, entertainment, education, vacations, etc). As long as you pay more than half of that, you can claim her as a dependent.

By the way, you aren't a dummy for asking the questions. There are some interesting issues with the credits.


    Bookmark   January 10, 2006 at 7:30PM
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I'm confused...I go to college but get a student loan to pay for it. In the past I have claimed my tuition but people are telling me now that I can't because I haven't paid on that loan.

This is what the IRS website says:
If tuition was paid by a government subsidized loan, can I still take the Hope or Lifetime Learning Credit?

If you take out a loan to pay higher education expenses, those expenses may qualify for the credit if you will be required to pay back the loan. The credit is claimed in the year in which the expenses are paid, not in the year in which the loan is repaid.

Confusing part (from above): The credit is claimed in the year in which the expenses are paid, not in the year in which the loan is repaid.

So can I claim my tuition even if I used a loan or can I only claim that which came out of pocket for the last year.
I'm so confused...

    Bookmark   January 31, 2006 at 5:33PM
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You can claim the tuition for an education credit or the tuition and fees deduction, if you are legally obligated to repay the loan. Based on the information you posted, you can claim either the credit or deduction. Which you claim depends on your individual circumstances. Taking on the legal responsibility for the loan that paid the tuition is the same as actually paying the tuition in the IRS's eyes.

Hope that helps


    Bookmark   January 31, 2006 at 9:15PM
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One more question...So if my tuition costs for last year was a loan for about 11,000 and then I paid for my books out of pocker which comes to about 2,000, then I can claim 13,000 for my tuition when it asks for it? Thanks.

    Bookmark   January 31, 2006 at 9:38PM
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Joan, if you are out there, have you ever heard of Someone on the money saving forum suggested it and I checked out the website, it's FREE. But I'm always skeptical of free stuff, anyone used it?

    Bookmark   February 7, 2006 at 2:34PM
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An important thing to consider while planning for next year's tax return - the Tuition & Fees Deduction expired 12/31/2005. You can still use that option for 2005 but for 2006 only the Hope & Lifetime Learning Credits will be available.

    Bookmark   April 5, 2006 at 5:35PM
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My son is in his first year of college. He has a sallie mae and a stafford loan along with school scholarships. He does not start repayment until he graduates.So nothing has been paid on loan. Does he deduct this or do we? I signed sallie mae on a co-signature loan.He did not earn enough working to file a return.Can he take the hope credit or the other college credit? We also received the 1098-T with a cost and payment was blank.

    Bookmark   February 8, 2007 at 11:57AM
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