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PT 8 Pub 970 (2009), Tax Benefits for Education
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 Posted 6:46 PM Mar. 1, 2010 PT 8 Pub 970 (2009), Tax Benefits for Education
7. Tuition and Fees Deduction (cont) The maximum tuition and fees deduction in 2009 is $4,000, $2,000, or $0, depending on the amount of your MAGI. See Effect of the Amount of Your Income on the Amount of Your Deduction , below. Form 1098-T. To help you figure your tuition and fees deduction, you should receive Form 1098-T (see chapter 4 for an example). Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by February 1, 2010. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amount in boxes 1 and 2 of Form 1098-T might be different than what you actually paid. When figuring the deduction, use only the amounts you paid in 2009 for qualified education expenses.
In addition, your Form 1098-T should give you other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether you were enrolled at least half-time or were a graduate student. The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.
If your MAGI is not more than $65,000 ($130,000 if you are married filing jointly), your maximum tuition and fees deduction is $4,000. If your MAGI is larger than $65,000 ($130,000 if you are married filing jointly), but is not more than $80,000 ($160,000 if you are married filing jointly), your maximum deduction is $2,000. No tuition and fees deduction is allowed if your MAGI is larger than $80,000 ($160,000 if you are married filing jointly). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for tuition and fees. However, as discussed below, there may be other modifications.
MAGI when using Form 1040A. If you file Form 1040A, your MAGI is the AGI on line 22 of that form, figured without taking into account any amount on line 19 (Tuition and fees deduction).
MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 38 of that form, figured without taking into account any amount on line 34 (Tuition and fees deduction) or line 35 (Domestic production activities deduction), and modified by adding back any:
Table 7-2 shows how the amount of your MAGI can affect your tuition and fees deduction. You can use Worksheet 7-1 on the next page to figure your MAGI.
Table 7-2.Effect of MAGI on Maximum Tuition and Fees Deduction
You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or Form 1040A. Enter the deduction on Form 1040, line 34, or Form 1040A, line 19. A filled-in Form 8917 is shown at the end of this chapter. If, after you file your 2009 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure a tuition and fees deduction on that return, you may have to repay all or part of the deduction. This applies to assistance and refunds received by the individual claiming the deduction, and, in the case of a student who claims the deduction, refunds received by anyone else who paid such expenses for the student. You must include the assistance or refund in income in the year you receive it to the extent that the deduction of the refunded amount reduced your tax in 2009. Refigure your tuition and fees deduction for 2009 as if the tax-free assistance or refund was received in 2009. Subtract the amount of the refigured deduction from the amount of the deduction you claimed on your 2009 tax return. The result is the amount you must include in income (recapture). Add the recapture amount to your income for the year in which you received the assistance or refund by entering it on the “Other income” line of Form 1040. Form 1040A cannot be used. Your 2009 tax return does not change. Example. You and your spouse paid $3,000 tuition and fees in December 2009 for your child who began college in January 2010. You filed your 2009 Form 1040 on February 15, 2010, showing a MAGI of $150,000. On that return you claimed a tuition and fees deduction of $2,000 (MAGI limitation). After you filed your return, your child dropped two courses and you received a refund of $1,400. You must refigure your 2009 tuition and fees deduction using $1,600 of qualified education expenses instead of $3,000. Your refigured deduction is $1,600. You must include the difference of $400 ($2,000 original deduction − $1,600 refigured deduction) on the “Other income” line of your 2010 Form 1040. Tim Pfister, a single taxpayer, enrolled full-time at a local college to earn a degree in engineering. This is the first year of his postsecondary education. During 2009, he paid $3,600 for his qualified 2009 tuition expense. Both he and the college meet all of the requirements for the tuition and fees deduction. Tim's total income (Form 1040, line 22) and MAGI are $26,000. He figures his deduction of $3,600 as shown on Form 8917 on the next page. Worksheet 7-1.MAGI for the Tuition and Fees Deduction
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Form 8917 for Tim Pfister
Table of Contents If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. See Contributions , later. This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.
What is the tax benefit of the Coverdell ESA. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.
If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. See Tax-Free Distributions, later. Table 8-1 summarizes the main features of the Coverdell ESA.
Table 8-1.Coverdell ESA at a Glance
A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary (defined below) of the account. When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. The document creating and governing the account must be in writing and must satisfy the following requirements.
Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Designated beneficiary. This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account.
Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. See chapter 9, Qualified Tuition Plan (QTP).
For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Eligible postsecondary school. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time.
These are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses.
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000. Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level. Contributions must meet all of the following requirements.
Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Table 8-2 summarizes many of the features of contributing to a Coverdell ESA. When contributions considered made. Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. They must be made by the due date (not including extensions) for filing your return for the preceding year.
For example, if you make a contribution to a Coverdell ESA in February 2010, and you designate it as a contribution for 2009, you are considered to have made that contribution on December 31, 2009.
There are two yearly limits:
Limit for each designated beneficiary. For 2009, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Rollovers are discussed under Rollovers and Other Transfers , later.
Example. When Maria Luna was born in 2008, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. In 2009, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. These contributions could be put into any of Maria's Coverdell ESA accounts. Limit for each contributor. Generally, you can contribute up to $2,000 for each designated beneficiary for 2009. This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary.
Reduced limit. Your contribution limit may be reduced. If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA.
Table 8-2.Coverdell ESA Contributions at a Glance
Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:
MAGI when using Form 1040NR-EZ. If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form.
You can use Worksheet 8-1 on the next page to figure your MAGI.
Worksheet 8-1.MAGI for a Coverdell ESA
Figuring the limit. To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Subtract the result from $2,000. This is the amount you can contribute for each beneficiary. You can use Worksheet 8-2 to figure the limit on your contributions.
Worksheet 8-2.Coverdell ESA Contribution Limit
Example. Paul, who is single, had a MAGI of $96,500 for 2009. Paul can contribute up to $1,800 in 2009 for each beneficiary, as shown in the illustrated Worksheet 8-2.
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