Chapter 19 Education-related adjustments ey.com/EYTaxGuide
Expired tax benefits The following benefits expired at the end of 2013 and are not available for 2014:
Student loan interest deduction. The amount of your student loan interest deduction for 2014 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return). You cannot take a deduction if your MAGI is $80,000 or more ($160,000 or more if you file a joint return). This is an increase from the 2013 limits of $60,000 and $75,000 ($125,000 and $155,000 if filing a joint return).
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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970 Tax Benefits for Education
Student loan interest deduction. You may be able to deduct up to $2,500 in interest you paid in 2014 on a qualified student loan used for higher education. This deduction reduces the amount of your income subject to tax, regardless of whether or not you itemize deductions. To qualify for the deduction, your modified adjusted gross income in 2014 must be less than $80,000 ($160,000 if you file a joint return) and you cannot file a return as married filing separately nor be claimed as a dependent on the tax return of another person. For more information, see Student Loan Interest Deduction
Tuition and fees deduction. (Note that this deduction expired at the end of 2013 and is not available for 2014 under current law. However, as of the date this book was published, Congress had been considering legislation to extend its availability for 2014. This discussion is included in the event the deduction is extended. For updated information on this and any other tax law changes that occur after this book was published, see our website, ey.com/EYTaxGuide .) You may be able to deduct qualified education expenses you paid during the year for tuition and fees at a college, university, or other qualifying postsecondary education institution. This deduction for tuition and fees is allowed as an adjustment in figuring your AGI; therefore, it reduces your taxable income even if you do not itemize deductions. The maximum deduction is $4,000 if your modified adjusted gross income (MAGI) is less than $65,000 ($130,000 if you are married filing jointly). The maximum available deduction shrinks to $2,000 if your MAGI is over $65,000 ($130,000 if filing jointly) and below $80,000 ($160,000 if filing jointly). No deduction is available if your MAGI exceeds $80,000 ($160,000 if filing jointly). The deduction is also unavailable—regardless of your MAGI—if your filing status for the year is married filing separately or you can be claimed as a dependent on the tax return of another person. In addition, deduction is disallowed if you or anyone else claims an American opportunity credit or lifetime learning credit with respect to the same student. See Tuition and Fees Deduction
Educator expenses deduction. (Note that this deduction expired at the end of 2013 and is not available for 2014 under current law. However, as of the date this book was published, Congress had been considering legislation to extend its availability for 2014. This discussion is included in the event the deduction is extended. For updated information on this and any other tax law changes that occur after this book was published, see our website, ey.com/EYTaxGuide .) If you were a teacher, instructor, counselor, principal, or aide for any grade(s) between kindergarten and 12th grade during the year, you can deduct up to $250 of qualified expenses you paid for books, supplies, equipment (including computer equipment, software, and other related services), and other materials used in the classroom. This deduction is allowed as an adjustment in figuring your adjusted gross income; therefore, it reduces your taxable income even if you do not itemize deductions. For more information, see Educator Expenses
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 $80,000 ($160,000 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 2014. Table 19-1 summarizes the features of the student loan interest deduction.
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
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 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 ($3,950 for 2014). 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.
Table 19-1
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: Student qualifications The student must be: 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.
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.
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.
Adjustments to qualified education expenses.
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970 Tax Benefits for Education