Above-the-Line Deduction for Qualified Higher Education Expenses

For tax years 2002 - 2005, the tax act permits taxpayers an ABOVE-THE-LINE deduction for "qualified educational expenses" for themselves, spouse, and dependents.

Qualified Educational Expenses Defined - These are tuition and fees required for enrollment or attendance at an accredited college, vocational school, or other post-secondary educational institution that is eligible to participate in the student aid programs administered by the Department of Education. Qualified expenses do NOT include room and board, insurance, transportation, or other similar personal, living, or family expenses. Qualified expenses may include fees for books, supplies, and equipment ONLY if the fee must be paid to the school for the student's enrollment or attendance. In addition, qualified expenses may include student activity fees if the fee must be paid to the school for the student's enrollment or attendance. Expenses do NOT include any costs for courses or instruction that involves sports, games, hobbies, or noncredit courses, unless the education is part of the student's degree program.

Adjustments to Qualified Educational Expenses - If you pay for higher education expenses with tax-free funds, you CANNOT claim a credit for those amounts. Some examples of tax-free funds are scholarships, Pell Grants, employer-provided education assistance, veterans' education assistance and any other nontaxable payments other than gifts, bequests, or inheritances.

In 2002 and 2003, taxpayers with modified adjusted gross income that does NOT exceed $65,000 ($130,000 for married couples filing a joint return) are entitled to a maximum above-the-line deduction of $3,000 per year. Taxpayers with modified adjusted gross income above these thresholds will NOT be entitled to a deduction. In 2004 and 2005, taxpayers with modified adjusted gross income that does not exceed $65,000 ($130,000 for married couples filing a joint return) are entitled to a maximum above-the-line deduction of $4,000 and taxpayers with modified adjusted gross income that does not exceed $80,000 ($160,000 for married couples filing a joint return) are entitled to a maximum above-the-line deduction of $2,000.

The above-the-line deduction will NOT be available AFTER tax year 2005!

NOTE: The above-the-line deduction CANNOT be taken if EITHER the Hope or Lifetime Learning Credit is taken for the student in the same year. In addition, if the student can be claimed as a dependent on another taxpayer's return, the student CANNOT claim the deduction. Furthermore, nonresident aliens do NOT qualify for the credit.

Click here for more information on education credits and education deductions.

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