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Office of Student Accounts and Accounting

Tax Relief Act
Taxpayer Benefits for Higher Education

The following information was prepared to inform students about the benefits and requirements contained in the Tax Relief Act of 1997. Information has been updated to include changes made by the federal government in 2005. It is based upon our understanding of the provisions contained in the law and should not be considered an official document. Students should rely upon the advise of their tax accountant or the Internal Revenue Services as appropriate.

Description of Tax Credits and
Student Loan Interest Deduction

Katrina Emergency Tax Relief Act of 2005 provides tax relief for persons affected by Hurricane Katrina. Under the Act, you may be able to claim an education credit, a student loan interest deduction, and/or a tuition and fees deduction. See IRS Publication 4492.

New for Hope or Lifetime Learning Credit for 2005 - Beginning in 2005, the amount of your Hope or Lifetime Learning Credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $43,000 and $53,000 ($87,000 and $107,000 if you file a joint return). You cannot claim a credit if your MAGI is $53,000 or more ($107,000 or more if you file a joint return). This is an increase from the 2004 limits of $42,000 and $52,000 ($85,000 and $105,000 if filing a joint return).

Hope Credit is a nonrefundable tax credit (i.e., low-income taxpayers with no tax liability receive no benefit). The benefit amount is 100 percent of the first $1,000 of "qualified tuition and related expenses" and 50 percent of the second $1,000, paid within a tax year to an eligible institution of higher education for the first two years of postsecondary at-least-half-time enrollment in a course of study leading to a degree or a recognized certificate. The maximum credit is $1,500 per eligible student. The Hope Credit is available to an independent student or, in the case of a dependent student, to the taxpayer entitled to claim that student as an income-tax exemption. The Hope Credit may be claimed for each qualifying student reported on a tax return. No student (or taxpayer claiming on behalf of that student) may claim a Hope Credit for more than two tax years, although one year does not appear to have to follow immediately on the other.

Lifetime Learning Credit is a nonrefundable credit equivalent to 20 percent of the first $5,000 ($10,000 in 2003) of "qualified tuition and related expenses" paid within a tax year, beginning July 1, 1998, to an eligible institution of higher education for a course of study leading to a degree, certificate, or improved job skills. The Lifetime Learning Credit is potentially available to independent students or, in the case of a dependent student, to the taxpayer entitled to claim that student as an income tax exemption. The Lifetime Learning Credit is available each year to each qualifying tax filer (eligible taxpayers who are married must file jointly), up to a maximum of $1,000, irrespective of how many eligible students are in the taxpayer's family (i.e., a maximum $1,000 per tax return).

Taxpayers cannot claim both a Hope and a Lifetime Learning Credit for a single student in the same tax year. However, the two credits can be claimed simultaneously for different qualifying students. Qualifying students may not have been convicted of felony drug possession or distribution. The reference to "out-of-pocket expenses" means the fee/tuition paid only for academically-related activities (e.g., not books, insurance, or student activity fees) less any "untaxed educational benefit" (e.g., grants, scholarships, or fee waiver). Eligibility for both credits is ratably reduced for single filers (taxpayers) with modified adjusted gross incomes between $40K and $50K and for joint filers with modified adjusted gross incomes between $80K and $100K.

Student Loan Interest Deduction - Individuals with education loan debt will be allowed to reduce their modified adjusted gross income for tax purposes for a maximum of five years by up to $2,500 in 2001 and thereafter. Taxpayers with multiple education loans, including consolidation loans, possible from various different lenders, will be permitted to claim the "deduction" for the combined totals of the eligible interest paid, up to the annual maximum.

Beginning January 1, 1998, for the first 60 months during which interest is due (months of deferral or forbearance do not count against the 60-month period) on loans made to pay for "qualified expenses" such as tuition, fees, books, room and board. The qualified expenses must be incurred on behalf of the taxpayer, his or her spouse or dependent. Eligibility is ratably reduced for single-filer taxpayers with modified adjusted gross income between $40K and $55K and for joint filer taxpayers with modified adjusted gross incomes between $60K and $75K. Beginning in 2003, the income ranges for phasing out the student loan interest deduction may be adjusted annually for inflation.

Education Savings Bond Program - Beginning in 2005, the amount of your interest exclusion will be phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $91,850 and $121,850. You cannot take the deduction if your MAGI is $121,850 or more. For 2004, the limits that applied to your were $89,750 and $119,750.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $61,200 and $76,200. You cannot take the deduction if your MAGI is $76,200 or more. For 2004, the limits that applied to you were $59,850 and $74,850.

For more information on the above education tax credits, visit the Internal Revenue Services web site at www.irs.gov or consult your tax preparer.

Page last updated September 26th, 2012.

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