Publication 17: Your Federal Income Tax; Education

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

Important Change for 2004

Maximum tuition and fees deduction increases to $4,000. Beginning in 2004, the amount of qualified education expenses you may take into account in figuring your tuition and fees deduction increases from $3,000 to $4,000 if your modified adjusted gross income (MAGI) is not more than $65,000 ($130,000 if you are married filing jointly). If your MAGI is larger than $65,000 ($130,000), but is not more than $80,000 ($160,000 if you are married filing jointly), your maximum tuition and fees deduction will be $2,000. No tuition and fees deduction will be allowed if your MAGI is larger than $80,000 ($160,000).

Introduction

This chapter discusses the education-related adjustments you can deduct in figuring your adjusted gross income.

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If you were an eligible educator in 2003, you may deduct up to $250 of qualified expenses you paid in 2003. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse may deduct more than $250 of his or her qualified expenses. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

Qualified expenses.

Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary.

Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. You must reduce your qualified expenses by the following amounts.

Excludable U.S. series EE and I savings bond interest from Form 8815.
Nontaxable qualified state tuition program earnings.
Nontaxable earnings from Coverdell education savings accounts.
Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2.

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, there is a special deduction allowed for paying interest on a student loan (also known as an education loan). This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2003. Table 21–1 summarizes the features of the student loan interest deduction.

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan,
Paid or incurred within a reasonable period of time before or after you took out the loan, and
For education provided during an academic period for an eligible student.

Reasonable period of time.

Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.

The expenses relate to a specific academic period, and
The loan proceeds are disbursed within a period that begins 60 days before the start of that academic period and ends 60 days after the end of that academic period.

If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances.

Academic period.

An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Table 21–1. Student Loan Interest Deduction at a Glance

Do not rely on this table alone. Refer to the text for more details.

Feature	Description
Maximum benefit	You can decrease your income subject to tax by up to $2,500.
Loan qualifications	Your student loan
	•	must have been taken out solely to pay qualified education expenses, and
	•	cannot be from a related person or made under a qualified employer plan.
Student qualifications	The student must be
	•	you, your spouse, or your dependent, and
	•	enrolled at least half-time in a degree program.
Time limit on deduction	You can deduct interest paid during the remaining period of your student loan.
Phaseout	The amount of your deduction depends on your income level.

Eligible student.

This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

Enrolled at least half-time.

A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the Department of Education under the Higher Education Act of 1965.

Loan from a related person.

You cannot deduct interest on a loan you get from a related person. Related persons include:

Your spouse,
Your brothers and sisters,
Your half brothers and half sisters,
Your ancestors (parents, grandparents, etc.),
Your lineal descendants (children, grandchildren, etc.), and
Certain corporations, partnerships, trusts, and exempt organizations.

Loan from a qualified employer plan.

You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.

Generally, for purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.

The cost of room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Eligible educational institution.

An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

For purposes of the student loan interest deduction, the term also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.

The educational institution should be able to tell you if it is an eligible educational institution.

Adjustments to qualified education expenses.

You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). See chapter 4 of Publication 970 for details.

Loan origination fees (other than fees for services), capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans are student loan interest if all other requirements are met. In addition to simple interest on the loan, the items discussed below can be student loan interest.

Interest on revolving lines of credit.

Revolving lines of credit, such as credit card debt, qualify if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses, earlier.

Interest on refinanced student loans.

This includes interest on both:

Consolidated loans — loans used to refinance more than one student loan of the same borrower, and
Collapsed loans — two or more loans of the same borrower that are treated by both the lender and the borrower as one loan.

Voluntary interest payments.

These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment.

You cannot claim a student loan interest deduction for interest on a loan if, under the terms of the loan, you are not legally obligated to make interest payments.

Generally, you can claim the deduction if all four of the following requirements are met.

Your filing status is any filing status except married filing separately.
No one else is claiming an exemption for you on his or her tax return.
Your modified adjusted gross income (MAGI) is less than $65,000 ($130,000 if you file a joint return). For details on figuring your MAGI, see chapter 4 of Publication 970.
You paid interest on a qualified student loan.

You cannot deduct as interest on a student loan any amount you can deduct under any other provision of the tax law (for example, home mortgage interest).

You are not considered to have made student loan interest payments actually made by your dependent, regardless of whether your dependent is legally liable for the loan. Also, payments made by anyone other than your dependent are not considered made by your dependent.

The amount determined above is phased out if your MAGI is between $50,000 and $65,000 ($100,000 and $130,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $65,000 or more ($130,000 or more if you file a joint return). For details on figuring your MAGI, see Publication 970.

Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555–EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4–1 in chapter 4 of Publication 970.

To help you figure your student loan interest deduction, you should receive Form 1098–E, Student Loan Interest Statement. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2003 on one or more qualified student loans must issue Form 1098–E (or acceptable substitute) to each borrower by February 2, 2004.

To claim the deduction, enter the allowable amount on line 25 of Form 1040, or line 18 of Form 1040A.

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or a dependent.

The tuition and fees deduction can reduce your income subject to tax by up to $3,000. It is available through 2005.

Table 21–2. Tuition and Fees Deduction <?Pub _newline>at a Glance

Do not rely on this table alone. Refer to the text for more details.

Question		Answer
What is the maximum benefit?		You can decrease your income subject to tax by up to $3,000.
Where is the deduction taken?		As an adjustment to income on Form 1040 or 1040A.
For whom must the expenses be paid?		A student enrolled in an eligible educational institution who is •you, •your spouse, or •your dependent.
What tuition and fees are deductible?		Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.

The following rules will help you determine if you can claim the tuition and fees deduction.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.

Qualified education expenses are defined below under What Expenses Qualify. Eligible students are defined later under Who Is an Eligible Student.

Your filing status is married filing separately.
Another person is entitled to claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
Your modified adjusted gross income (MAGI) is more than $65,000 ($130,000 if filing a joint return).
You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
You or anyone else claims a Hope or lifetime learning credit in 2003 with respect to expenses of the student for whom the tuition and related expenses were paid.

The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses paid in 2003 in connection with enrollment at an institution of higher education during 2003 or for an academic period (defined earlier under Student Loan Interest Deduction) beginning in 2003 or in the first 3 months of 2004.

Payments with borrowed funds.

You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

Eligible educational institution.

Related expenses.

Student-activity fees and fees for course-related books, supplies, and equipment are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

Deduct higher education expenses you deduct under any other provision of the law, for example, as a business expense,
Deduct qualified education expenses for a student on your income tax return if you or anyone else claims a Hope or lifetime learning credit for that same student in the same year,
Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and in chapter 8 (QTP) of Publication 970.
Deduct qualified education expenses that have been paid with tax-free interest on U.S. savings bonds (Form 8815). See Figuring the Tax-Free Amount in chapter 10 of Publication 970.
Deduct qualified education expenses that have been paid with tax-free scholarship, grant, or employer-provided educational assistance. See the following section on Adjustments to qualified expenses.

Adjustments to qualified expenses.

If you paid qualified higher education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. You must reduce the qualified expenses by the amount of any tax-free educational assistance and refunds you received.

Tax-free educational assistance.

This includes:

Tax-free part of scholarships and fellowships (see chapter 1 of Publication 970),
Pell grants (see chapter 1 of Publication 970),
Employer-provided educational assistance (see chapter 11 of Publication 970),
Veterans' educational assistance (see chapter 1 of Publication 970), and
Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Refunds.

Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses, later.)

If a refund of expenses paid in 2003 is received before you file your tax return for 2003, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2003 tax return, see When Must the Deduction Be Repaid (Recaptured), in chapter 6 of Publication 970.

The above rule also applies to loan proceeds the eligible education institution refunds to the lender on behalf of the borrower.

Amounts that do not reduce qualified education expenses.

Do not reduce qualified education expenses by amounts paid with funds the student receives as:

Payment for services, such as wages,
A loan,
A gift,
An inheritance, or
A withdrawal from the student's personal savings.

Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.

The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
The use of the money is not restricted and the money is used to pay education expenses that are not qualified (such as room and board).

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses.

Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.

Comprehensive or bundled fees.

Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098–T, Tuition Statement. See How Much Can You Deduct, later, for more information about Form 1098–T.

For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution. The student must have either a high school diploma or a General Educational Development (GED) credential.

Generally, to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:

The maximum deduction you can claim in 2003 is $3,000. However, the amount of your modified adjusted gross income (MAGI) determines whether the deduction is allowed. For details on figuring your MAGI, see chapter 6 of Publication 970.

Generally, you figure the deduction using the Tuition and Fees Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, Form 2555-EZ, or Form 4563, or if you exclude income from sources within Puerto Rico, you must complete the worksheet in chapter 6 of Publication 970.

To help you figure your tuition and fees deduction, you should receive Form 1098–T,Tuition Statement. Generally, an eligible educational institution (such as a college or university) must issue Form 1098–T (or acceptable substitute) to each enrolled student by February 2, 2004.

To claim the deduction, enter the allowable amount on Form 1040, line 26, or Form 1040A, line 19.

Table 21–3. Who Can Claim a Dependent's Expenses?

Do not rely on this table alone. See Who Can Claim a Dependent's Expenses in chapter 6 of Publication 970.

IF your dependent is an eligible student and you...	AND...	THEN...
claim an exemption for your dependent	you paid all qualified education expenses for your student	only you can deduct the qualified education expenses that you paid. Your dependent cannot take a deduction.
claim an exemption for your dependent	your dependent paid all qualified education expenses	no one is allowed to take a deduction.
do not claim an exemption for your dependent, but are eligible to	you paid all qualified education expenses	no one is allowed to take a deduction.
do not claim an exemption for your dependent, but are eligible to	your dependent paid all qualified education expenses	no one is allowed to take a deduction.
are not eligible to claim an exemption for your dependent	you paid all qualified education expenses	only your dependent can deduct the amount you paid. The amount you paid is treated as a gift to your dependent.
are not eligible to claim an exemption for your dependent	your dependent paid all qualified education expenses	only your dependent can take a deduction.

Education - Related Adjustments

Important Change for 2004

Introduction

Useful Items - You may want to see: