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Education Tax Information

Introduction

The Taxpayer Relief Act of 1997 includes provisions for education tax credits and deductibility of interest on educational loans. Also, qualified higher education expenses may be deductible as an adjustment to income on page 1 of Form 1040 (see “Tuition and Fees Deduction”, below). Accordingly, you should consult your tax advisor about your specific circumstances. Based on information currently available, we have compiled the following information as a service to Penn students and their families. We suggest that you print or save this page as an easy reference. Penn cannot provide individual tax advice and shall not be liable for damages of any kind in connection with this information.

Additional information regarding these credits and deductions is available on the web at http://www.irs.gov/pub/irs-pdf/p970.pdf.

Education Tax Credits

The Hope Scholarship Credit and the Lifetime Learning Credit are two tax credits for payments of qualified post-secondary educational expenses. These are non-refundable credits against federal income tax liability, which may be claimed for qualified tuition and related expenses paid on behalf of students in the taxpayer's family (i.e., the taxpayer, spouse, or eligible dependents) who are enrolled in a postsecondary educational program.

Penn has contracted with Tax Credit Reporting Service (TCRS) for the performance of a number of functions related to the education tax credits.

In accordance with IRS requirements, Penn is required to mail a Form 1098-T to every student enrolled in any term during calendar year 2008. The 1098-T is a notice to the student of information that Penn will be providing to the IRS. TCRS will mail 1098-Ts on Penn’s behalf in late January to the permanent address carried in the Student Records System.

Schools are required to transmit financial information (qualified charges and grants/scholarships) on the 1098-T form to the IRS. In order to further assist students and their parents to determine their eligibility for the tax credits, TCRS will include a Supplemental Form, on the reverse side of the 1098-T, which will provide a summary of relevant student account transactions, including payments and loans and non-qualified charges, for 2008.

If you have questions about the credits or about the information on your Supplemental Form or on the TCRS website, please call TCRS at 1-877-467-3821. TCRS has staff specially trained to deal with these inquiries. TCRS also maintains a secure website (http://www.1098T.com) which shows the specific transactions summarized on the Supplemental Form. Please, do not call SFS.

Questions & Answers

Q. What are the enrollment requirements?
Q. How much credit may be claimed?
Q. What are qualified expenses?

Qualified expenses are charges for tuition and fees (e.g. General Fee and Educational Technology Fee) an individual is required to pay in order to be enrolled (the Recreation Fee is included for full-time undergraduates). They do not include charges for room, board, books & supplies, or other living expenses.

Q. What are out-of-pocket payments?

Generally, these include payments made not only by cash or check, but also by parent and/or student loans and by credits from qualified state tuition programs.

Q. Are there income limitations on who may claim a credit?

Yes. The credits will start to phase out for married couples with modified adjusted gross incomes of $94,000 in 2008.  Married filing jointly taxpayers with modified adjusted gross incomes of $114,000 or above are not eligible to take the credits. For singles or heads of household, the benefit of the credits starts to phase out for incomes above $47,000. A taxpayer with a modified adjusted income of $57,000 or greater is not eligible to take the credits.

Q. May a taxpayer claim both a Hope Scholarship and Lifetime Credit?

Yes, but not for the same student. For example, if the taxpayer is in graduate school, and has two children in college, one in the freshman year and one in the junior year, he or she may claim the Hope Credit for payments on behalf of the freshman and the Lifetime Learning credit, up to $2000, for payments on behalf of himself and the junior.

Q. Can both the parent and the student claim the credit?

No. Either the student or the parents may claim the credit, but not both. If the student is claimed as a dependent by his or her parents, only the parents may claim the credit. If not, only the student may claim the credit.

Q. Are there filing restrictions on who may claim a credit?

Yes. Married taxpayers filing separately may not claim a credit.

Q. What does non-refundable mean?

The credit may be used to reduce the taxpayer's federal income tax liability. However, if the taxpayer's federal tax liability before application of the credit is less than the amount of the credit, the difference would not be refunded to the taxpayer. It is not necessary for you to get a receipt as evidence of your payment. You may want to retain subsequent monthly bills that indicate the dates of payments made. You may also use PENN InTouch to print your account history.

Q. How do I claim an education tax credit?

You must complete IRS Form 8863 (Education Credits). You must file a 1040 or 1040A to claim a credit; you may not use a 1040EZ.

Supplemental Form

Provides aggregate 2008 data for four types of student account transactions:

The law provides that credits may be claimed for payments made in the taxable year of qualified charges for any academic term beginning in the taxable year or the first three months of the subsequent year. Therefore, the information regarding charges and grants is based on the term to which they apply, regardless of the date on which the transaction was posted to your student account. On the other hand, information regarding payments is based on the date the transaction was posted, regardless of the term to which it was applied.

The Supplemental Form also provides, where applicable, data on adjustments to prior year charges (tuition and mandatory fees) and grant aid (scholarships/grants). These amounts reflect transactions posted to your account after December 31, 2008, for semesters occurring in calendar year 2008. If you or someone else claimed an education tax credit on your behalf for the 2008 taxable year, you may have to recalculate the eligibility for the 2008 tax credit, taking these prior year adjustments into account.

Tuition and Mandatory Fees

Qualified charges (expenses) are defined as charges required in order for the student to be enrolled. We have included tuition, general fee, educational fee, and other fees charged to all students in a given academic program (e.g. the recreation fee for full-time undergraduates). Charges for books and supplies, room, board, and other living expenses are expressly excluded.

The status of laboratory fees is not clear. We have not included them because they are not required for enrollment in the program. In most cases, eligibility for the tax credits will not be affected by whether or not lab fees are considered qualified expenses.

Information on qualified charges has been included for all terms in 2008, even if the transaction was posted to your student account in another year. For example, tuition charges for Spring 2008 may be used to determine qualified expenses for the tax credits even though they may have been posted to your account in December 2007. On the other hand, you may have to take into account, for either credit, adjustments made after December 31, 2008, to Fall 2008 charges.

Adjustments in 2008 to Qualified Expenses for Terms Prior to January 1, 2008: Under IRS regulations, if there is an increase in 2008 for Qualified Expenses for terms prior to 2008, they are added to Qualified Expenses for terms in 2008. However, if there are reductions for terms in prior years, they are reported as prior year adjustments.

PLEASE NOTE: You may use Spring 2009 charges in determining your qualified expenses for Taxable Year 2008 if you made a payment toward them in 2008. If you do, you must also take Spring 2009 grants into consideration. Because of the timing of the 1098-T’s, we have not included Spring 2009 charges or grants on your Supplemental Form or on the website.

When viewing your transactions on the TCRS website, you may see transactions with dates different from those on your student account. In some cases, we have aggregated multiple transactions for the same charge, using the latest transaction
date from your student account.

Other Charges

We have included non-qualified charges on the Supplemental Form and on the TCRS website solely for the purpose of allowing you to see what was specifically not included in your qualified charges. Non-qualified charges should not be taken into account in determining eligibility for education tax credits.

Information on non-qualified charges is included for all terms in 2008, even if the transaction was posted to your student account in another year.

When viewing your transactions on the TCRS website, you may see transactions with dates different from those on your student account. In some cases, we have aggregated multiple transactions of the same type, using the latest transaction date from your student account.

Scholarships and Grants

In determining the amount of qualified expenses towards which out-of-pocket payments may be allocated, you will have to take into account non-taxable grants and scholarships that you received for the terms in question. The instructions for Form 8863 state that you must reduce the total of your qualified expenses by any tax-free educational assistance. Therefore, we have included on Supplemental Forms those grants and scholarships you received for those academic terms for which qualified charges are reported.

Information on grant charges is included for all terms in 2008, even if the transaction was posted to your student account in another year. For example, a Pell Grant for Spring 2008 is included even if it was posted to your account in December 2007. On the other hand, changes in grant amounts for 2008 terms posted after December 31, 2008 must also be considered.

Adjustments in 2008 to Qualified Expenses and Grants for Terms Prior to January 1, 2008: Under IRS regulations, if there is an increase in 2008 for Grants for terms prior to 2008, they are added to Grants for terms in 2008. However, if there are reductions for terms in prior years, they are reported as prior year adjustments.

PLEASE NOTE: You may use Spring 2009 charges in determining your qualified expenses for Taxable Year 2008 if you made a payment toward them in 2008. If you do, you must also take Spring 2009 grants into consideration. Because of the timing of the 1098-T’s, we have not included Spring 2009 charges or grants on your Supplemental Form, or on the Website.

When viewing your transactions on the TCRS website, you may see transactions with dates different from those on your student account. In some cases, we have aggregated multiple transactions of the same type using the latest transaction date from your student account.

Payments/Loans

Only those payments with a transaction date in Taxable Year 2008 are reported. This differs from charges and grants, which are reported on a term basis regardless of whether the transaction was posted to your student account in Taxable Year 2008. Only payments made in 2008 may be counted in determining eligibility for an education tax credit for Taxable Year 2008. For example:

For purposes of education tax credits, credits from educational loans may be counted as payments. A taxpayer claiming credit for payments on behalf of a dependent child may count both parent and student loan credits as payments.

Note that IRS rules generally define the date of a payment as the date it was mailed. We have reported your payments based on the date they were posted to your student account. There is a possibility that payments made at the very end of 2008 were not posted until 2009, and therefore not included on the Supplemental Form and Website.

Tuition and Fees Deduction

The maximum deduction:

The maximum amount a borrower may deduct for tax year 2005 is $4,000.

Eligibility:

The maximum deduction is available to taxpayers whose adjusted gross income is under $160,000 if filing a joint return, or $80,000 if filing a single return. No tuition and fees deduction is available for taxpayers whose adjusted gross income is larger than $80,000 if filing a single return, or $160,000 if filing a joint return.

A dependent may not claim the deduction for him or herself.

In order to use the deduction:

The deduction can only be claimed for tuition and fees—not books or room and board—of the taxpayer, a spouse, or a dependent.

The taxpayer must subtract the amount of any scholarships and other educational assistance before calculating the deduction. Taxpayers using a Qualified Tuition Plan (Qualified Savings Plan or Prepaid Tuition Plan) are subject to special rules and may wish to consult a qualified tax adviser.
You cannot claim a deduction for Higher Education Expenses in the same year you claim the Hope or Lifetime Learning credit.

The deduction is reduced by amounts received as nontaxable distributions from Qualified Tuition Plans (Qualified Savings Plans or Prepaid Tuition Plans), Coverdell Education Savings Accounts (formerly Education IRAs), interest exclusion on educations savings bonds, and certain scholarship.

Educational Loan Interest Deduction

Beginning January 1, 1998, taxpayers who have taken loans to pay the cost of attending an eligible educational institution for themselves, their spouse, or their dependents generally may deduct interest they pay on these student loans. If you paid interest on a student loan in 2005, you may be able to deduct up to $2,500 of the interest you paid.

Questions & Answers

Q. Are there any limits on what qualifies as a student loan?

Yes. The loan must have been used to pay the costs of attendance at an eligible educational institution for a student enrolled at least half-time in a program leading to a degree, certificate, or recognized credential.

Q. Is a student loan interest deduction available if the student loan is not federally guaranteed or otherwise subsidized?

Yes. As long as the loan was used to pay the costs of attendance at an eligible educational institution and the other eligibility requirements are met, the deduction is available for the interest on the loan. The deduction does not depend on whether the loan is federally guaranteed or subsidized. The exceptions to this are loans from relatives or qualified employer plans.

Q. What costs are included in the costs of attendance?

Costs of attendance include all items that are included in costs of attendance for purposes of calculating a student's financial need in accordance with the Higher Education Act. Thus, they include tuition, fees, room, board, books, equipment, and other necessary expenses such as transportation. Costs of attendance include more items than are included in qualified tuition and related expenses for purposes of the Hope Scholarship and Lifetime Learning Credits.

Q. Is the deduction available for interest paid on loans used to pay for graduate school?

Yes.

Q. Are there any limits on who may take the student loan deduction?

Yes, there are income restrictions. To claim the maximum deduction, a taxpayer must have a modified adjusted gross income less than $70,000 (less than $1340,000 for married taxpayers filing jointly). The amount of taxpayer's deduction is gradually reduced for taxpayers with modified adjusted gross incomes between $55,000 and $70,000 (between $110,000 and $140,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross incomes of $70,000 or greater ($140,000 or greater for married taxpayers filing jointly) may not claim the student loan interest deduction.

Q. May a parent claim the student loan interest deduction if the parent borrows to pay his/her child's cost of attending college?

Yes. An individual may claim the student loan interest deduction if the individual borrows money to pay the costs of attending college for certain members of the individual's family or household (including his/her children) and incurs the debt in a year in which the individual supplies more than half of the student's support.

Q. Does an individual have to itemize his/her tax deductions to claim the student loan interest deduction?

No. The student loan interest deduction is available regardless of whether an individual elects to take standard deduction or to itemize deductions.

Q. If a student is claimed as a dependent by his/her parent in a particular taxable year, may the student take the student loan interest deduction for student loan interest that he/she pays in that year?

No. The student may not claim the student loan interest deduction in any taxable year in which he/she is claimed as a dependent on another taxpayer's return. However, if the student continues to pay interest on a student loan and meets other eligibility requirements, the student may claim the student loan interest deduction for payments made in a later year when the student is no longer a dependent on his/her parent's Federal income tax return.

Page Updated: 08-Nov-2012