A New Deduction for Higher Education Expenses

Recent tax law changes also provide a special deduction for taxpayers with qualified higher education expenses for years 2003 thru 2005.  Expenses that qualify for the deduction are based upon the same expenses that qualify for the Educational Credits, i.e. tuition and related expenses (not room and board) that have been paid for yourself, your spouse, or a dependent.  The deduction is not available for single taxpayers who could be claimed as a dependent on another return.  For 2003, a maximum annual deduction of $3,000 is available if your and your spouse's annual income is less than $130,0000 ($65,000 for single taxpayers).  For 2004 and 2005, the deduction is limited to $4,000.

If a Coverdell ESA or Education Saving Bonds (discussed above) are tapped to pay tuition expenses, the higher education expense deduction is not available.  Additionally, you may not claim the deduction in the same year that you claim the HOPE or Lifetime Learning credit for the same student.  Nor is the deduction available if you took a tax-free distribution from a Qualified Tuition Program (discussed below).

So far, we have seen that all our tax-favored educational funding tools are subject to Adjusted Gross Income limitations.  Are any of the tools not subject to AGI limits?  Yes, two, and both are equally usable and a good choice for upper, middle and lower income taxpayers alike: Employer Educational Assistance Programs and Qualified Tuition Programs.