Can You Deduct College Tuition if It Was Paid Using a Loan?
The Internal Revenue Service offers several tax breaks for college tuition, including the tuition and fees deduction and the lifelong learning credit. Just because you use a loan to pay for your tuition does not disqualify you from these tax benefits. Some states may also allow you to claim additional deductions or credits.
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Qualifying Loans
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As of the time of publication, you can use costs paid for with qualifying loans to qualify for the tuition and fees deduction. These loans can be subsidized loans, which the government pays the interest on as long as you are in school, or unsubsidized loans, which you have to pay the interest on or allow the interest to capitalize. You claim the deduction in the year that you use the money to pay for the college tuition, not the year that you repay the loan.
If your college receives the loan directly, count the tuition as paid in the year that the money is credited to your school account. For example, if your school receives your federal loan funds in December 2011, you would include that amount on your 2011 tax return. If the college receives the funds in January 2012, you must wait until filing your 2012 tax return to claim the tuition paid.
Maximum Tuition Deduction
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The IRS caps the tuition and fees deduction at $4,000 of qualifying expenses per year, even if you pay more than that in expenses. Only tuition and required fees can be included in the deduction, so if you pay other costs with your loan, such as room and board, you cannot include those costs in the deduction. You cannot use the deduction for tuition and fees covered by scholarships or grants. You cannot claim the tuition and fees deduction if you are married but file separate returns or if your modified adjusted gross income exceeds the annual limits. As of 2011, the MAGI limit equals $80,000 for single, widowed or head of household filers, and $160,000 for joint filers.
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Lifelong Learning Credit
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Paying for college tuition with loans can also qualify you for the lifelong learning credit, but the IRS forces you to choose only one tax break to claim each year. The lifelong learning credit often results in greater income tax savings because it grants a credit equal to 20 percent of your college tuition, up to $10,000, for a maximum credit of $2,000. A credit reduces your income taxes directly, whereas a deduction only reduces your taxable income. You cannot claim the lifelong learning credit if you are married and filing separately, or if your MAGI exceeds the annual limits.
Reporting Your Deduction
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To claim either the tuition and fees deduction or the lifelong learning credit, file your taxes with Form 1040 or Form 1040A. For the tuition and fees deduction, to show the IRS how you arrived at your deduction value, you have to fill out Form 8917. If you file with Form 1040, the deduction goes on line 34; on Form 1040A, the deduction goes on line 19. Because the IRS categorizes tuition and fees as an adjustment to income, you can still claim the standard deduction. If you claim the lifelong learning credit, you have to complete Form 8863 to figure the credit. Then, you report the credit on either line 49, if using Form 1040 for your tax return, or line 31, if using Form 1040A.
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