The latest tax help for families facing the high costs of higher education is an above-the-line deduction for qualifying college costs. "Above-the-line" means you can claim this tax-saver even if you use the standard deduction rather than itemizing. The write-off lets you deduct up to $4,000 of qualifying expenses in 2005. There are all sorts of restrictions, of course, but if you qualify, this new deduction can offer an important helping hand
The deduction is available to parents who pay for their kids' education and to non-dependent students who are paying their own way. It covers the same expenses covered by the Hope credit—tuition and other qualifying fees, but not room and board. college costs.
There are income restrictions, too. For 2005, single taxpayers with adjusted gross income of $65,000 and less and married taxpayers with AGI of $130,000 or less can qualify for the full $4,000 deduction. A stunted, $2,000 deduction is available for single taxpayers with AGI between $65,000 and $80,000 and for those filing joint returns with income between $130,000 and $160,000. Above $80,000 or $160,000, though, no deduction is allowed.
Note this, too: You can’t claim this deduction in a year you claim a Hope or Lifetime Learning tax credit for the same student. But since the income phase out range for those credits is lower than for this deduction, some taxpayers who have been locked out of the credits will get some help from this write-off.
If you have your choice between the deduction and one of the credits it will be easy to determine which one is more valuable to you. A credit reduces your tax bill dollar for dollar, a deduction reduces your taxable income, so your savings are based on your tax bracket. Say for example, that your only qualifying expense for 2005 is the $4,000 you paid for a graduate level course which qualifies for the lifetime learning credit. The credit, which is 20% of the first $10,000 of qualifying expenses would be $800. Claiming a $4,000 deduction instead would be worth $1,000 in the 25% bracket. On the other hand, if you paid $10,000 in qualifying expenses, the 20% credit could be worth $2,000, while the value of the deduction would still be limited to $1,000.