New Deduction for College Expenditures
by Wanda Dean, CPAWhy can’t you just outright deduct college costs? Good question. In fact, you may be able to starting next year. A brand-new break will allow you write off to up to $3,000 of college tuition and fees for you, your spouse, or any person who can be claimed as a dependent on your tax return. This new deduction will be “above-the-line,” meaning you need not itemize to benefit. However, the deduction will vaporize once your AGI exceeds $65,000 if you are single or $130,000 if you file a joint return. (There’s no gradual phase-out here; you will either be 100% eligible or 100% ineligible.)
In 2004 and 2005, the maximum deduction will increase to $4,000 and be subject to the same AGI limits. However, in those two years, singles with AGI between $65,000 and $80,000 will be entitled to a maximum $2,000 deduction, and so will joint filers with AGI between $130,000 and $160,000.
That’s the good news. Now for all the restrictions.
First, you are completely ineligible for this write-off if you are married and file separately from you spouse.
No deduction is allowed to any person who can be claimed as a dependent on another person’s return.
You cannot take tax-free education IRA or tax-free QTP payouts for college expenses and then claim a deduction for those very same expenses.
Similarly, you cannot claim the Hope Scholarship or Lifetime Learning tax credit for college expenses and then claim a deduction for the very same expenses.
Finally, this new break will expire after 2005 unless Congress takes action to extend the deal.
