for College Tuition Tax Benefits
Mark E. Riley, Cindy L. Seipel, and P. Larry Tunnell
2006 - The College Board estimates that the annual cost of
attending a private university during the 2003/2004 academic
year, including tuition, fees, room, and board, was $26,854,
while the annual cost at a public university was $10,636.
Fortunately, a number of education-related tax benefits are
available to help taxpayers pay for a college education. Three
of these, the Hope Scholarship Credit (HSC), the Lifetime
Learning Credit (LLC), and the Higher Education Expense Deduction
(HEED), are based on the amount of tuition paid and are the
focus of this article.
Scholarship Credit (HSC)
HSC is designed to help taxpayers afford certain costs associated
with the first two years of college education. The HSC is
generally available to either a qualifying student or a
taxpayer who may claim a qualifying student as a dependent
on her federal income tax return. The HSC is equal to 100%
of the first $1,000 of qualified tuition and related expenses,
and 50% of the remaining qualified tuition and related expenses,
for a maximum credit of $1,500 per year per qualifying student.
qualify for the HSC, a student must meet the following five
The student must not have claimed the credit, or had it
claimed based on his expenses, for any two prior taxable
The student must have completed less than two years of
academic credit (as determined by the student’s
college) as of the beginning of the taxable year. Many
students receive academic credit for advanced placement
classes or exams, but this is not considered. In addition,
if a student loses credit because of transferring to another
college, a common occurrence, only the credit allowed
by his current college counts toward the two-year limit.
student must enroll at least half-time for at least one
academic period that begins during the taxable year.
The student must be enrolled in a program of study leading
to a degree, certificate, or other recognized postsecondary
The student must not have been convicted of a felony offense
for possession or distribution of illegal drugs.
who is eligible for the HSC during a tax year may compute
the credit using all qualified tuition and related expenses
incurred during that year, even if the expenses occurred
after the end of the second year of academic credit.
HSC is phased out for taxpayers with adjusted gross income
(AGI) over a certain inflation-adjusted amount. For 2004,
the phase-out range was an AGI from $42,000 to $52,000 ($85,000
to $105,000, for taxpayers married filing jointly).
1. John, a dependent of his parents, enrolled
at State University in the fall of 2001. He goes less than
full time and completes two years of academic credit in
the spring of 2004. His tuition expenses are $1,000 per
semester, two semesters per year, and neither he nor his
parents claimed the HSC in 2001 or 2002, because they did
not owe taxes in those years. His parents claimed an HSC
of $1,500 in 2003 and are also eligible to claim an HSC
of $1,500 in 2004. They can base the HSC in 2004 on John’s
tuition for both spring and fall, even though he completed
his two years of academic credit in the spring semester.
Had they claimed the HSC in 2001 and 2002, however, they
could not have claimed it in 2003 or 2004, because of the
Learning Credit (LLC)
LLC equals 20% of the first $10,000 of tuition and required
fees paid for either undergraduate or graduate credit. While
the LLC is less generous than the HSC, the qualifications
to take the LLC are less restrictive than those of the HSC.
Unlike the HSC, with its restrictive first-two-years requirement,
the LLC can be taken at any stage of the student’s
education. The HSC requires that the student be going at
least half time, but the LLC has no course-load requirement.
Even a student taking only one class is eligible for the
the HSC, the LLC is gradually phased out for taxpayers with
AGI from $42,000 to $52,000 ($85,000 to $105,000 for taxpayers
married filing jointly).
2. Assume the same facts as in Example 1.
If John attends college in 2005, his parents will be eligible
for only the LLC or HEED; because he finished his first
two years of academic credit in 2004, he is no longer eligible
for the HSC.
HSC requires that the student be enrolled in a program leading
to a degree or certificate, but the LLC can be based on
qualified expenses incurred either as part of a postsecondary
degree program (either undergraduate or graduate), or as
part of a nondegree program taken to acquire or improve
job skills. A taxpayer can take the HSC with respect to
a particular student for only two taxable years, but the
LLC can be taken for any number of years. A student with
a felony drug conviction is ineligible for the HSC, but
is eligible for the LLC.
LLC limit of $2,000 ($10,000 x 20%) is applied to each taxpayer
or tax return, while the HSC limit of $1,500 is applied
to each student. While the LLC and the HSC cannot be taken
in the same year with respect to the same student, a taxpayer
can take the LLC with respect to one or more students (children,
spouse, herself) and the HSC with respect to one or more
3. Joe and Sue have four children in college:
Bill, Cathy, Diane, and Ed. They are a senior, junior, sophomore,
and freshman, respectively. Each child is incurring tuition
and fees of $6,000. In addition, Joe has paid tuition and
fees of $5,000 for night classes. Diane and Ed qualify for
the HSC, and all of the children and Joe qualify for the
LLC and the HEED. Joe and Sue can claim either the HSC or
the LLC for both Diane and Ed, or the HSC for one and the
LLC for the other. To maximize their credits, however, they
would claim an HSC of $1,500 each for Diane’s and
Ed’s expenses. If the HSC is taken with respect to
any of their expenses, Diane’s or Ed’s expenses
that are not used for the HSC are ineligible for the LLC
or the HEED. The expenses of Joe, Bill, and Cathy are eligible
for either the LLC or the HEED, so the LLC could be calculated
based on $10,000 of expenses associated with two of them—for
example, Bill’s $6,000, and $4,000 of Joe’s
tuition and fees. The HEED could be taken based on the expenses
of the other—e.g., $4,000 of Cathy’s tuition.
Education Expense Deduction (HEED)
the HSC or LLC is not taken with respect to the higher education
expenses of a particular student, an above-the-line HEED
is allowed for payments of tuition and fees for that student.
The deduction has been increased in 2004 and 2005 to a maximum
of $4,000, but is less for taxpayers with AGI (before deducting
the HEED) above certain levels. For a taxpayer with AGI
more than $65,000 ($130,000 for a joint return), but less
than $80,000 ($160,000 in the case of a joint return), the
maximum HEED is $2,000. No deduction is allowed for taxpayers
with AGI more than $80,000 ($160,000 for a joint return).
is no gradual phase-out of the HEED. For taxpayers whose
AGI is at the HEED cutoff points above, a $1 deduction from
other sources could conceivably result in a $2,000 increase
in the HEED.
4. Doug and Linda (married, filing jointly)
have a daughter in her senior year of college, and their
AGI before the HEED is $130,001. Their LLC is completely
phased out. They can take a HEED of $2,000, but if they
had only one more dollar of deductions, which would have
brought their AGI before the HEED down to $130,000, they
could have taken a HEED of $4,000.
in most states and municipalities computing taxable income
begins with the taxpayer’s AGI, the HEED is effectively
deductible against state taxable income. In contrast, neither
the HSC nor the LLC is allowed as a credit against any state
or local income tax. In addition, because the HEED reduces
AGI, it can also reduce a taxpayer’s phase-outs of
certain tax items or put the taxpayer in a lower tax bracket.
5. Randy and Teresa have a son in college,
and they paid his tuition of $7,500 in 2004. At this level
of tuition payments, their HSC and LLC will be equal, at
$1,500. Their HEED would be preferable to the HSC and LLC
if their combined state, local, and federal marginal rates
total more than 37.5% ($4,000 x 0.375 = $1,500), and the
HEED is deductible for state and local tax purposes where
with Other Plans and Accounts
from qualified tuition plans (QTP) or Coverdell education
savings accounts (ESA) are generally not taxable to the
extent they are used to pay qualified educational expenses.
Qualified educational expenses for purposes of the QTP and
ESA include tuition and related expenses, books, supplies,
and equipment required for enrollment—a broader definition
than that used for the HSC, LLC, or HEED. A taxpayer may
take the QTP or ESA exclusions and also claim one of the
college tuition tax benefits. However, a taxpayer who is
eligible for a QTP or ESA exclusion and one of the college
tuition tax benefits cannot reap a double benefit on the
taken into account in computing the HSC, LLC, or HEED reduce
the total expenses that may be taken into account in determining
the portion of a QTP or ESA distribution that is excludable
from a taxpayer’s income. Because the QTP and ESA
distribution exclusions are not subject to any phase-out,
these exclusions might be preferable to the college tuition
tax benefits discussed above for taxpayers with higher AGIs.
Questions on College Tuition Tax Benefits
may take the HSC, LLC, or HEED? A taxpayer
is allowed to take the credits and the deduction (hereafter
referred to collectively as college tuition tax benefits)
based on expenses she has paid for the education of herself,
her spouse, or her dependents. With respect to the HSC and
LLC, even if a dependent student pays the expenses, the
taxpayer claiming the student as a dependent is treated
as having paid those expenses, and may claim the credits
on her own return.
who qualify to claim a student as a dependent and have an
AGI high enough to force a phase-out of the credits should
consider allowing the student to take the HSC or LLC himself.
If the taxpayer does not claim the dependency exemption,
the student is allowed to claim the credit. If the student
takes a credit that would otherwise be phased out, the tax
burden for the family as a whole would be reduced. In this
case, it does not matter whether the taxpayer or the student
is the one who actually pays the expenses.
with respect to the HEED and dependents are more restrictive.
Not just any student who qualifies as a dependent of another
can claim the HEED on his tax return. To claim the HEED
for the educational expenses of a dependent, the taxpayer
herself must a) actually pay the related expenses for a
dependent, and b) claim the dependency exemption. Neither
the taxpayer nor the dependent student is allowed the deduction
if the taxpayer fails to meet both conditions. If a taxpayer
pays the expenses of a student who does not qualify as a
dependent, the amount paid is treated as a gift to the student
and a subsequent payment by the student. Only the student
is allowed to claim the HEED for these expenses under such
circumstances. An individual who is married and filing separately
may not claim the HSC, the LLC, or the HEED.
more than one benefit be taken at a time?
The tuition of each individual student is eligible for the
full HSC, as long as they otherwise qualify for it, so one
taxpayer could be eligible for more than $1,500 of HSC,
provided she can claim the tuition of more than one student
(e.g., a spouse or children). On the other hand, the LLC
and HEED limits apply to the taxpayer, not the student,
so while a taxpayer can take the LLC or the HEED with respect
to more than one student, the total tuition the taxpayer
claims for these benefits cannot exceed $10,000 for the
LLC or $4,000 for the HEED, no matter how many students
can be claimed. In addition, no two of the three benefits
may be taken with respect to the same student.
6. Steve and Laurie had three children in
college, all of whom qualified for the HSC, LLC, and HEED,
and each of whom had tuition of $7,000 in 2004. Steve and
Laurie could: a) take the full HSC for each child for a
total credit of $4,500; b) take the HSC for two children
and either the LLC or HEED for the third; or c) take the
HSC for one child and split the $10,000 LLC tuition limit
or the HEED limit between the other two. In fact, they could
split the LLC and HEED limits among their children however
they choose, as long as no two of the three benefits are
taken with respect to the same child.
can benefits be claimed? The general rule
is that the college tuition tax benefits must be taken in
the tax year in which both the payment and the academic
period related to the payment occur. The rules do, however,
allow prepayments to be applied toward the tuition benefits
in the year they are paid, as long as the related academic
period begins during the first three months of the taxpayer’s
next taxable year. Taxpayers might be able to use prepayments
to increase the expenses in the prepayment year and take
advantage of the full limits on the college tuition tax
benefits in that taxable year. Under certain circumstances,
a student might be better served by deferring payment until
the taxable year in which the related academic period begins.
7. Patty begins junior college in the fall
of 2006, and her tuition is $1,000 per semester. If she
prepays her spring 2007 tuition in 2005, she can claim an
HSC of $1,500 based on her $1,000 of tuition for fall 2004
and her prepaid $1,000 of tuition for spring 2007. If she
does not prepay her tuition, she would be eligible for only
a $1,000 HSC in 2004.
expenses qualify? The rules are the same for
the HSC, LLC, and HEED. Expenses that qualify generally
include all tuition and academic fees. Expenses that do
not qualify include tuition for courses related to sports,
games, or hobbies (unless the courses are part of the student’s
degree plan), as well as books or room and board. Fees that
are not related to a student’s academic course of
instruction, such as student activity fees or athletic fees,
do not qualify for the credits.
college tuition tax benefits cannot be taken with respect
to any expenses for which a deduction is taken under any
other IRC provisions. This includes, but is not limited
to, business deductions under IRC section 162 and the higher
education expense deduction under IRC section 222.
here to see an Exhibit.
E. Riley, CPA, is a graduate student of accounting
at Rawls College of Business, Texas Tech University, Lubbock.
Cindy L. Seipel, PhD, CPA, and P.
Larry Tunnell, PhD, CPA, are associate professors
of accounting in the department of accounting and business
computer systems at College of Business Administration and
Economics, New Mexico State University, Las Cruces, N.M.