Can You Count on the Tuition Deduction?
Friday, June 20, 2008; 12:00 AM
I cannot find any status on whether the expired tuition and fees deduction will be reinstated for tax year 2008. What's the 411? I have a college tuition bill due in about a month and need to know whether to fund it from my 529 or personal funds.
That's a great question. The tuition and fees deduction did expire at the end of 2007, but we expect Congress to renew it for 2008 returns.
If it is renewed and you qualify to take the deduction, then it's important to pay part of the tuition bill with money that isn't from a tax-advantaged 529 or Coverdell Education Savings Account because the IRS does not permit double-dipping of tax benefits. For more information on how these rules work, see Which College Accounts to Tap First.
In the past, Congress has waited so long to renew the law - long after the fall tuition bills were due, and even after the tax forms were printed for 2006. So it's a good idea to anticipate the change when deciding which money to spend rather than waiting for Congress to act.
Before considering the tuition and fees deduction, however, first see if you qualify for a Hope or Lifetime Learning credit instead. These credits are more valuable because they lower your tax bill dollar for dollar. And they've already been approved by Congress for 2008 and beyond.
To qualify for either credit, your income in 2008 must be less than $116,000 on a joint return (or $58,000 if you're single). The Hope credit provides a tax credit of up to $1,800 per child for the first two years of college, as long as you've paid at least $2,400 of your college bills from an account other than a 529 or Coverdell ESA.
After your child's first two years of college, you may qualify for a Lifetime Learning credit of up to $2,000 per tax return. To receive the credit, you have to pay at least $10,000 in college bills from a source other than a 529 or Coverdell.
If your income is too high for the Hope and Lifetime Learning credits, then you should consider the tuition and fees deduction. To qualify for the full $4,000 deduction last year, your adjusted gross income had to be $130,000 or less on a joint return ($65,000 if single), which could lower your tax bill by up to $1,000 if you were in the 25% bracket. You could deduct up to $2,000 in tuition and fees if your joint income was $160,000 or less ($80,000 or less if single). There was no deduction if you earned more than that. The income cut-offs have not changed for inflation over the past few years. You don't need to itemize to qualify.
Find out how much of a deduction you're likely to qualify for ($2,000 or $4,000), then pay at least that much of the tuition bills in 2008 from an account other than a 529 or Coverdell -- if you do have money available in another account. If you can spread your withdrawals from the 529 and Coverdell over several years, then you can benefit from the tax-free withdrawals without sacrificing the tax credits or deductions.