A number of variables can affect the tax-deductible portion of your college tuition and fees. It may depend on whether your college tuition and fees are qualified, the amount of income you report and whether your tuition costs exceed the maximum deduction. Since there's more than one way to write off tuition, the deduction you choose can also change how much you'll save.
College tuition and fees are usually a student's most substantial expenses. However, you might be able to deduct other school-related costs when claiming the tuition and fees deduction. The Internal Revenue Service only allows you to include qualified education expenses when calculating the deduction. Qualified education expenses always cover tuition and activity fees. If the college requires you to buy books, supplies or course materials directly from the school as a condition of enrollment, these costs are qualified as well. Note, however, that if the college you attend is unable to take part in the federal student aid program, none of your school expenses are qualified.
The most you can deduct in qualified tuition and fees is $4,000 per year. In other words, if your college charges $10,000 in tuition, 40 percent, or $4,000, is the most you can deduct. You may have to reduce your deduction substantially -- even if you paid more than enough to take the maximum deduction -- if your modified adjusted gross income (MAGI) is more than $65,000, or more than $130,000 if you're married and filing a joint return. Unless you live and work in a foreign country and claim the foreign earned income exclusion or a related tax benefit, your MAGI is the same as the adjusted gross income (AGI) reported on your return before taking the tuition deduction into account.
You may have to cut the deduction even further for any tax-free assistance you receive, such as Pell Grants, fellowships and private scholarships. For example, if you paid $4,000 in qualified tuition with a $1,000 Pell Grant and $3,000 in student loans, the most you can deduct is $3,000. Tax-free assistance also covers tuition reimbursements from an employer if the amount isn't taxed as wages or subject to tax withholding.
If you enroll in college to maintain or improve skills relevant to your current profession or to satisfy a condition of employment, more of your tuition costs might be deductible. When you take the work-related education deduction on the IRS Schedule A form, your tuition, fees, commuting expenses and the cost of buying books, supplies and equipment for your courses -- whether required or not -- are deductible. Although there's no dollar limit, the total of your work-related college tuition plus all other job-related and miscellaneous expenses you report on Schedule A is reduced by 2 percent of your AGI to arrive at the amount you'll be able to deduct.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.