ADJUSTMENTS TO INCOME

Adjustments are items that can be subtracted from your gross income (total income) in computing adjusted gross income.  For a complete list of the adjustments allowed under the United States tax code, see lines 23-35 of the Form 1040 tax return.

 Below are brief summaries of two adjustments to income that relate to you as a student (or to your parents) and two tax credits.  If you or your parents think you might qualify for any of these, consult your tax advisor for the details, or go to the IRS website at http://www.irs.gov/. 

  1. Tuition and Fees Deduction (line 34 of the Form 1040)--If you pay your tuition, you can likely qualify for the tuition and fees credit.  If your parents can claim an exemption for you on their tax return and they pay your tuition, they can probably claim the deduction.  Even if you or your parents qualify for the tuition and fees deduction, it should not be taken if claiming the Hope Scholarship Credit or lifetime learning credit (both are explained below) will lower your tax more.  You are not eligible for the tuition and fees deduction if your modified adjusted gross income is $80,000 ($160,000 if filing a joint return).  Following is a table provided by the IRS which highlights the major features of the tuition and fees deduction.
Question   Answer

What is the maximum benefit?

   You can reduce your income subject to tax by up to $4,000.
Where is the deduction taken?   As an adjustment to income on Form 1040 or Form 1040A.
For whom must the expenses be paid?   A student enrolled in an eligible educational institution who is either:
•you,
•your spouse, or
•your dependent for whom you claim an exemption.
What tuition and fees are deductible?   Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.

More detailed information on the tuition and fees deduction is available in Chapter 6 of  IRS Publication 970.

  1. Student Loan Interest Deduction (line 33 of the Form 1040)—Interest paid on student loans can be deducted each year during which you are making payments on the loans (prior to 2002, the interest was deductible for only the first five years).  The maximum amount of interest which can be deducted in 2008 is $2,500.  This deduction cannot be taken if your modified adjusted gross income is $70,000 or more ($145,000 or more if filing a joint return).  In fact, the amount of interest you can deduct is gradually reduced if your modified adjusted gross income is between $55,000 and $70,000 ($115,000 and $145,000 if filing a joint return).  More detailed information on the student loan interest deduction is available in Chapter 4 of  IRS Publication 970.

TAX CREDITS 

  1. Child tax credit—This credit is available to families with children under age 17.  The credit for 2008 is $1,000 per child.  "The child tax credit can by claimed for a son, daughter, adopted child, grand child, stepchild, or eligible foster child.  The child must have the same residence as you for more than half of the taxable year except for absences due to illness, education, business, vacation, or military service."  The child tax credit is reduced if your modified adjusted gross income is above $75,000 ($110,000 if filing a joint return).  To find more complete information on the child tax credit, consult IRS Publication 972.
  2. Hope Scholarship Credit--The maximum credit that can be claimed is $1,800 per student.  The Hope credit can be claimed for a student if all five of the following qualifications are met. 

More detailed information on the Hope Scholarship Credit can be accessed in Chapter 2 of IRS Publication 970.

  1. Lifetime Learning Credit--The maximum credit that can be claimed is $2,000 (20% of the first $10,000 of qualified expenses) per family.  The credit is available for tuition and fees paid for post-secondary education, or for any course of instruction to acquire or improve job skills.  The Lifetime Learning Credit is designed to aid parents who have students in the junior or senior year, or individuals who are taking a course (or courses) to improve job skills or train for a new job.  The Lifetime Learning Credit can be claimed for an unlimited number of years. 

Taxpayers cannot claim both the Hope Scholarship Credit and the Lifetime Learning Credit.  Taxpayers with a modified gross income of $58,000 or more (single filing status) or $116,000 or more (married filing jointly) cannot claim either credit.  The credit is reduced for single taxpayers with modified adjusted gross income between $48,000 to $58,000 ($96,000 to $116,000 for those filing a joint return).

The Bankrate.com Web site provides the following table as a comparison of the Hope Scholarship Credit and the Lifetime Learning Credit.

Comparison of education credits

Hope credit
Lifetime Learning credit
Up to $1,800 credit ($3,600 if a student in a Midwestern disaster area) per eligible student
Up to $2,000 credit ($4,000 if a student in a Midwestern disaster area) per tax return.
Available only until the first two years of postsecondary education are completed
Available for all years of postsecondary education, as well as for courses to acquire or improve job skills.
Available only for two years per eligible student.
Available for an unlimited number of years.
Student must be pursuing an undergraduate degree or other recognized education credential.
Student does not need to be pursuing a degree or other recognized education credential.
Student must be enrolled at least half time for at least one academic period beginning during the year.
Available for one or more courses.
Not available if student has a felony drug conviction on his or her record.
Felony drug conviction rule does not apply.

More complete information can be obtained on the Lifetime Learning Credit in Chapter 3 of IRS Publication 970.