Student Loan Interest Deduction and Tuition, Fees Deduction Offer Tax Incentives for Higher Education

There are federal employees who have student loans, either that they took out in their names or have student loans they took out on behalf of a dependent. Many of these employees were paying back these student loans during 2020. The interest paid on these student loans may be deductible on an employee’s 2020 federal income tax return.

Some federal employees who paid qualified higher education expenses during 2020 on behalf of themselves, a spouse, or a dependent may be eligible to claim a “tuition and fees” deduction on their 2020 federal income taxes.

This column discusses the student loan interest deduction and the tuition and fees deduction. Eligible employees can claim both deductions as an adjustment to income (“above the line”) deduction, reported on IRS Form 1040 Schedule 1.

As an adjustment to income, both the student loan interest deduction and the tuition and fees deduction reduces an individual’s gross income and therefore one’s federal income tax liability and, in most states that have state and local income taxes, an individual’s state income tax liability.

Student Loan Interest Deduction

A tax deduction may be taken on the 2020 federal income tax return by an individual who is obligated to pay interest on qualified education loans. The deduction is allowed for the interest portion of the student loan payment during the entire loan term that interest payments are required under the terms of the loan. Note that any individual who paid more than $600 in student loan interest during 2020 should have received a Form 1098-E (Student Loan Interest Statement) from the student loan lender.

As an adjustment to income, the student loan interest deduction is available to an eligible individual, regardless of whether they itemize deductions. The deduction is reported on Form 1040 Schedule 1, line 20.

A qualified student loan is any debt incurred by an individual to pay for qualified higher education expenses on behalf of a qualified student attending an eligible educational institution. A qualified student includes the individual taking out the student loan, the individual’s spouse, or the individual’s tax dependent. A qualified student must be enrolled at least half time in a program leading to a degree, certificate or other recognized educational credential.

An eligible educational institution is any college, university, vocational school or other post-secondary institution eligible to participate in a student and program, administered by the U.S. Department of Education. Included are virtually all accredited, public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions.

An individual paying back student loans during 2020 who was married as of Dec. 31, 2020 must file a joint return with his or her spouse in order to be eligible to deduct student loan interest on the 2020 federal income tax return. The individual cannot file as married filing separate.

Also, the individual cannot be claimed as a tax dependent on another individual’s tax return.
A parent can take the deduction for the interest paid on a child’s student loan if the parent is legally obligated to make the payments, actually makes the payment, and the parent claims the child as a tax dependent.

Eligibility for the student loan interest deduction phases out as an individual’s modified adjusted gross income (MAGI) increases. The following table summarizes:

Student Loan Interest Deduction
Maximum Amount = $2,500

1 MAGI = Adjusted gross income + foreign earned income or housing exclusion + foreign housing deduction + exclusion for income from certain U.S. possessions or Puerto Rico + tuition and fee deduction.

Qualified Education Expenses for Student Loan Interest

For purposes of the student loan interest deduction, the student loan proceeds must have been used to pay the qualified education expenses which are the total costs of attending an eligible educational institution, including graduate school. These expenses include amounts paid for the following items:

(1) tuition and fees;

(2) room and board;

(3) books, supplies, and equipment; and

(4) other necessary expenses such as transportation.

Tuition and Fees Deduction

Individuals are allowed to claim an “above-the-line” (adjustment to income) “tuition and fees” deduction on their 2020 federal income tax return for qualified higher education expenses. The expenses must be paid on behalf of the individual, the individual’s spouse, or the individual’s tax dependent. The deduction is reported on Form 1040 Schedule 1, line 21.

The deduction is limited based on an individual’s modified adjusted gross income (MAGI, see below). The deduction is not allowed for married filing separate filers or for any individual who qualifies as a dependent (whether or not claimed) on another individual’s tax return. The following table presents the tuition and fees deduction for the year 2020:

Tuition and Fees Deduction Limit for 2020

Qualified Education Expenses for Tuition and Fees Deduction

Tuition and fees required for the enrollment or attendance at an eligible educational institution for the individual, the individual’s spouse or the individual’s tax dependent. Charges and fees associated with books, supplies, and equipment are qualified expenses if the amount must be paid to the eligible educational institution as a condition of the enrollment or attendance of the student.

Room, board or transportation expenses are not included as qualified education expenses for the tuition and fees deduction. In addition to being college level courses, the expenses must be for legitimated educational reasons. Sports, hobby or noncredit courses do not qualify unless the class is required as part of a degree program.

In general, the tuition and fees deduction is allowed for qualified education expenses paid in 2020 in connection with enrollment at an institution of higher education during 2020, an academic period beginning in 2020, or an academic starting sometime in the first three months of 2021.

An academic period includes semester, trimester, quarter or other period of study (for example, a summer school session). Those individuals who attended colleges or universities during 2020 should have received 2020 Form 1098-T (Tuition Statement) from their college or university. Form 1098-T reports tuition expenses paid during 2020.

The tuition and fee deduction for 2020 is claimed on IRS Form 8917 (Tuition and Fees Deduction). Once determined the deduction is entered on IRS Form 1040 Schedule 1, line 21.

The following chart is a summary and comparison of the Student Loan Interest Deduction and the Tuition and Fees Deduction.

Student Loan Interest Deduction/Tuition and Fees Deduction