Costs of Higher Education
Scholarship or Fellowship Grants
Qualified scholarships are excluded from gross income by a degree candidate at an educational organization.
A qualified scholarship means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses. Qualified tuition and related expenses means tuition and fees required for the enrollment or attendance of a student at an educational organization, and fees, books, supplies, and equipment required for courses of instruction at such an educational organization. An educational organization normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.
The limitation is the previous does not apply to a portion of any amount received which represents payments for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or tuition reduction. This portion of the otherwise excluded scholarship is generally required to be included in gross income. There is no exclusion for amounts for personal living expenses, such as meals and lodging.
Employer Educational Assistance Programs
An employee may exclude up to $5,250 from income for amounts paid by the employer for educational assistance at the undergraduate and graduate levels, if the educational assistance program meets requirements related to nondiscrimination in favor of highly compensated employees and notice of availability to other employees. Educational assistance includes tuition, books, supplies, and an employer provided educational course, but not assistance for courses involving sports, hobbies, or games.
Qualified Tuition and Related Expenses
Prior to 2014, an individual taxpayer was allowed an above-the-line deduction for qualified tuition and related expenses paid by the taxpayer during the taxable year. Qualified tuition and related expenses are the costs of enrollment or attendance at an educational organization of higher institution for a student who is the taxpayer or spouse or dependent of the taxpayer. This does not include costs for books, housing, student and sports activities which are unrelated to academic instruction, or for courses related to sports or hobbies unless such courses are part of the student’s degree program.
Any tuition or related fee that is funded with an amount that is excluded from gross income does not qualify as such an expense. However, tuition and related fees funded by gifts excluded from income do qualify. The amount of such tuition or expenses is reduced by the amount of such expenses taken into account in determining the amount of any exclusions related to United States savings bonds, qualified tuition programs established by the states or eligible educational institutions, and Coverdell education savings accounts.
There is a ceiling on the deductible amount which is reduced or eliminated as the taxpayer’s adjusted gross income exceeds certain limits. A taxpayer with adjusted gross income not in excess of $65,000 or $130,000 for married couples filing joint returns may deduct a maximum of $4,000 per year. Taxpayers with adjusted gross income not in excess of $80,000 or $160,000 for married filing joint may deduct a maximum of $2,000 per year. In the case of any other taxpayer, zero deduction.
American Opportunity and Lifetime Learning Credits
The American Opportunity Credit is a per student credit, only for the first two years of the student’s post secondary education, of 100% of the first $2,000 of qualified tuition, related fees and course materials, and 25% of the amount between $2,000 and $4,000 of the expenses. The maximum credit is $2,500. The student must be at least a half time student during the year.
The amount of the credit is reduced or phased out as the taxpayer’s modified adjusted gross income exceeds $80,000 for single taxpayers ($160,000 for married filing jointly). And the credit is fully phased out as MAGI reaches $90,000 and $180,000.
The Lifetime Learning Credit is a per taxpayer credit of 20% of qualified tuition and related expenses up to $10,000, and thus a maximum of $2,000 for any year of the students post-secondary education. This credit does not require a half time student status.
The credit is reduced or phased out as the taxpayer’s modified adjusted gross income exceeds $54,000 for single taxpayers and $108,000 for married couples filing joint. The credit is fully phased out as the MAGI reaches $64,000 and $128,000.
For any tax year only one of the two credits is allowed for any student. The expenses for the credit are not allowed a double advantage of being deducted under some other provision.