How Much Tuition and Fees Can You Deduct From Your Taxable Income?
In principle, educational expenses or interest on student loans can be deducted when calculating taxable income. The proportion of the expenses that can be deducted depends on the person's overall income, and some people may not be allowed any deduction. In some cases, these deductions may contribute to the person being able to carry a tax "loss" into a different tax year.
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Terminology
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Technically you cannot deduct anything from "taxable income." This is because taxable income is the amount left over after all deductions. Specifically, you start with gross income, which is the actual income you received, including profits from business. You then take away certain sums of money, which leaves you with adjusted gross income. Finally, you take away allowable deductions, which can be itemized or a standard amount, to produce taxable income.
Adjusted Gross Income
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Some educational costs are deducted from gross income to produce adjusted gross income. This includes some or all of the interest paid on student loans during the tax year, and some or all of the tuition fees and other educational costs paid during the tax year. Both deductions require a calculation, which is carried out on worksheets on the instructions for form 1040 booklet for student loan interest, and on form 8917 for tuition fees and educational costs. Though the calculations are relatively complex, the general principle is that people on higher incomes will only be allowed to deduct part of the expenses.
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Exceptions
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A person whose tax status is married filing separately cannot deduct educational costs on his tax return and calculation. A person whose modified adjusted gross income exceeds $75,000, or $150,000 for those who are married filing jointly, cannot claim the student loan interest deductions. There also are caps on the total deduction allowed for educational costs. As of 2011, these are $4,000 for most people and $2,000 for some higher earners.
Carry Forward
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People who have a negative taxable income may be able to carry the "loss" back or forward and apply it to a different taxable year. This process involves recalculating income and deductions using slightly different rules. For higher earners, this may mean the amount of educational expenses that can be deducted for the purposes of this calculation is reduced.
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