Joint return. Yet another dependency test requires that the student not be married filing a joint return with his or her spouse unless solely to claim a refund (Sec. 152(c)(1)(E)).
The loans must be used to pay educational expenses for the taxpayer, spouse or dependents
A college student may alternately be the taxpayer’s dependent as a qualifying relative, with tests at Sec. 152(d). For a detailed discussion of the dependency rules, see Dependency Exemption Issues for College Students, The Tax Adviser, , page 546.
Deduction of student loan interest. The loans can be used for tuition, fees and supplies, as well as room and board and other necessary expenses (Sec. 221). Up to $2,500 per year of interest paid on education loans is deductible. This is an above-the-line deduction, so the taxpayer does not have to itemize to take advantage of it. However, the deduction phases out when modified adjusted gross income (MAGI) is between inflation-adjusted limits: $60,000 to $75,000 for single and head-of-household filers (for 2011 and 2012) and between $120,000 and $150,000 for (between $125,000 and $155,000 for 2012).
The American opportunity tax credit phases out for press the link right now single taxpayers with MAGI between $80,000 and $90,000 and for married taxpayers filing jointly between $160,000 and $180,000 (Sec
Married taxpayers filing separately cannot take the deduction. If the student can be claimed as a dependent on another taxpayer’s return, he or she cannot take a deduction for student loan interest (Sec. 221(c)). If the loan is in the student’s name, the parents may not take the deduction even if they pay the interest. Parents can deduct the interest only if the loan is in their name and they actually pay the interest.
Deduction for tuition and fees. Taxpayers can claim a deduction (also above the line) of up to $4,000 for qualified tuition and fees they pay if they meet the income guidelines (Sec. 222). Qualified expenses for this deduction include only tuition and fees. For 2011, single taxpayers with MAGI less than $65,000 ($130,000 for married filing jointly) can deduct up to $4,000 (Sec. 222(b)(2)(B)). For single taxpayers with MAGI between $65,000 and $80,000, and married taxpayers with MAGI between $130,000 and $160,000, the deduction is reduced to the lesser of $2,000 or the amount paid. For single taxpayers with income over $80,000 ($160,000 for married taxpayers), no deduction is allowed. Married taxpayers filing separately are not eligible for the deduction.
Note that this provision expired at the end of 2011 and, unless retroactively extended (as occurred in 2010 for that tax year through 2011), is not available for 2012 expenses.
For parents to claim this deduction, they must pay the tuition and fees for their child, and they must claim the child as a dependent. The deduction for tuition and fees cannot be taken for the same student in the same year as the American opportunity tax credit or the lifetime learning tax credit (Sec. 222(c)(2)). Additionally, the same expenses cannot be used as qualified expenses for tax-free treatment of savings plan distributions (such as Sec. 529 distributions) and the deduction for tuition and fees or the education credits.
American opportunity tax credit. This credit is up to $2,500 per student in a degree program for the first four years of college. The first $2,000 is a dollar-for-dollar credit for qualified educational expenses. The other $500 of the credit is 25% of the next $2,000 of qualified expenses (Sec. 25A(i)). Eligible expenses for this credit are tuition and fees and other required course expenses including books and other course materials (Sec. 25A(i)(3)), but they do not include room and board. 25A(d)).
