Description
Taxpayers may deduct qualified higher education expenses from federal
taxable income through tax year 2016. The maximum deduction is $4,000. The
deduction is allowed for amounts paid for qualifying higher education expenses
(tuition and fees required for enrollment). A taxpayer may deduct expenses paid
for their own qualifying higher education expenses, or for the expenses of a
dependent. An individual who is claimed as a dependent on someone else's return
may not claim the deduction.
The federal government extended this deduction to tax years 2015 and 2016 in
December 2015. Minnesota has not conformed to this deduction for tax years 2015 or 2016.
Minnesota did conform for tax years 2010 to 2014, but did not for 2007 to 2009. Affected taxpayers
will be required to add the amount deducted at the federal level to their state
taxable income on their 2015 state returns, as they did for tax years 2007 to 2009.
Tax benefits
The deduction for higher education expenses results in a reduction in
federal income taxes for taxpayers who have regular tax
liability. The amount of the reduction depends on the taxpayer's marginal rate,
and if the taxpayer is eligible for any credits or is subject to the alternative
minimum tax (AMT). Since Minnesota has not conformed to the deduction for tax year 2015 or 2016
there is no state tax benefit.
A taxpayer claiming the tax year 2016 maximum deduction of $4,000 who has
taxable income in the 25 percent federal bracket is not eligible for any credits, and is not subject to
the AMT, will experience an income tax reduction of $1,000 at the federal level.
A taxpayer with a $4,000 deduction in 2016 who has taxable income only in the bottom
federal bracket (10 percent) is not
eligible for any credits, is not subject to the AMT, and will experience a tax
reduction of $350 at the federal level.
Interaction with other programs
Taxpayers may not claim either the American Opportunity credit or the Lifetime
Learning credit in a tax year in which they claim the deduction for higher
education expenses. Taxpayers may also claim the deduction allowed for interest
earned on Education Savings Bonds, and the exemption allowed for
withdrawals from an Coverdell ESA or a qualified tuition program (QTP),
but only for qualifying expenses that were not claimed using the higher education expense
deduction. Taxpayers may claim the higher education expense deduction for
expenses paid with distributions from a QTP, to the extent
the distributions are included in taxable income. Taxpayers may claim the higher
education expense deduction for expenses paid with funds obtained through a
student loan, with the interest on the loan allowed as an income tax
deduction at the time the loan is repaid.
Eligibility
The higher education expense deduction is subject to an income
limitation. The maximum deduction of $4,000 is allowed for married taxpayers
with AGI less than $130,000, and for single and head of household filers with
AGI under $65,000. A reduced deduction of
$2,000 is allowed for married taxpayers with AGI from $130,000 to $160,000, and
for single and head of household filers with AGI from $65,000 to $80,000.
Taxpayers with adjusted gross income above the thresholds in effect for the tax
year may not deduct higher education expenses. The deduction is allowed only at
the federal level in tax years 2007 to 2009 and 2015 to 2016, and at the federal and state levels in 2010 to 2014.
The deduction will not be allowed beyond tax year 2016 unless Congress acts to extend it. If Congress extends the
deduction beyond 2016, the state would have to conform to the extension in order for it to apply at the state level.
March 2016