Since 2002, many families have taken a deduction on their tax return for tuition and fees related to higher education. For tax year 2016, families could deduct up to $4,000 of these expenses “above the line,” which means they did not have to itemize deductions to deduct these expenses. The tax law allowing the deduction was not permanent. While it was extended many times since 2002, it effectively expired for tax years after 2016. Those holding out hope that the deduction would be part of the December 2017 Tax Cuts and Jobs Act were disappointed when it was not included as part of the bill, so many assumed the deduction was effectively “dead.”
However, on February 9, 2018 (coincidently just one week after Groundhog Day), the deduction came back once again through the Bipartisan Budget Act of 2018 retroactive to 2017! The IRS has yet to update Form 8917 (Tuition and Fees Deduction) and Line 34 of Form 1040 to allow you to report these expenses. Look for software updates to your tax software soon which will allow you to take the deduction. Note that this deduction has been resurrected only for 2017, so we will need to “wait and see” if it is extended for 2018 and later years.
There are limitations, however. The deduction is limited to $4,000 for taxpayers whose Adjusted Gross Income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or $2,000 for taxpayers with an AGI that doesn’t exceed $80,000 ($160,000 for joint filers). Note also that you cannot take both a tax credit (American Opportunity Tax Credit or Lifetime Learning Credit) on the same $4,000 of college expenses upon which you take the deduction. Given the choice, the tax credits will save you more in tax dollars than the deduction.
Unfortunately, calculating the tax benefits available to families with college expenses is not for the faint of heart. Seek help from your CPA or a college financial adviser if you have questions.
Cost of Attendance (COA) – Includes tuition and fees, room and board, books and supplies.
Merit Scholarship – Grants offered by some (but not all) schools based on student’s incoming grades and/or standardized test scores. Awarded to students in the top ~25% of incoming class.
Needs-Based Grants – Grants (not loans or work study) awarded based on financial need.
Private Scholarships – Scholarship awards that come from sources other than the college.
Total 529 Savings Plan – 529 savings in the parent’s or student’s names only.
Parent Pledged Assets – Any non-529 assets (e.g., savings, investments) that parents have set aside for the student for college.
Parent Pledged Monthly Cash Flow – Annualized amount of monthly cash flow that parents will divert to fund college.
American Opportunity Tax Credit – Maximum annual $2,500 tax credit per student often claimed on parent’s tax return. Income limits apply.
Student Pledged Assets – Student’s savings and/or investments that will go towards college
Student Pledged Monthly Cash Flow – Annualized amounts typically from work study or part-time jobs.
Grandparent and Other help – Amounts paid from 529s, savings, investments, etc of non-immediate family members including grandparents, uncles, aunts, and possibly ex-spouses.
Pre-Approval Amount – Total funds for college other than grants and loans
Funding Gap – Net cost of college less Pre-Approval amount. Typically equal to the total amount of loans that will be needed.
Loans – Federal Direct Student Loans are based on FAFSA filings and awarded through the school. Federal Direct Parent PLUS loans are taken out by the parents. Perkins Loans program has been discontinued as of 2018.
Remaining Funding Gap – Difference between Net Cost and all sources of funding (incl loans).
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