Effective for tax years beginning on or after January 1, 1997, the Massachusetts legislature enacted a new income tax deduction for certain college tuition payments. See G.L. c. 62, § 3(B)(a)(11), as added by St. 1996, c. 151, §§ 204, 687. This Technical Information Release (TIR) explains the requirements that must be met for a taxpayer to qualify for the college tuition deduction.
General Laws chapter 62, § 3(B)(a)(11) provides a deduction for individuals against Part B income for:
[a]n amount equal to the amount by which tuition payments by the taxpayer to a two or four-year college in which the taxpayer or a dependent of said taxpayer, pursuant to subparagraph three of paragraph b of subsection B, is enrolled, less any scholarships, grants or financial aid received, exceeds twenty-five percent of the taxpayer's Massachusetts adjusted gross income, exclusive of this deduction.
1. Effective Date
The provision is effective for undergraduate college tuition expenses paid after December 31, 1996, for education furnished to the taxpayer or a dependent in academic periods beginning after such date.
2. Eligible Educational Institution
To be an eligible educational institution for purposes of the college tuition deduction, a college must offer at least a two year program and meet all criteria for participation in the federal Department of Education student aid programs. (1) There is no requirement that the educational institution be located in Massachusetts.
The taxpayer or a dependent must be enrolled in a course of study at an eligible educational institution that is at least a two year program leading to an undergraduate or associate's degree, diploma or certificate. Tuition payments for students pursuing graduate degrees at such a college or university are not eligible for the college tuition deduction. Thus, no deduction is allowed for any amount of tuition paid for a graduate level course taken by an individual pursuing a program leading to an advanced academic or professional degree such as a program in business, medicine or law.
3. Qualified College Tuition Expenses
For purposes of this deduction, "qualified college tuition expenses" include only those expenses designated as tuition or mandatory fees required for the enrollment or attendance of the taxpayer or any dependent of the taxpayer at an eligible educational institution.
No deduction is allowed for any amount paid for room and board, books, supplies, equipment, personal living expenses, meals, lodging, travel or research, athletic fees, insurance expenses, or other expenses unrelated to an individual's academic course of instruction.
4. Qualified Tuition Payments
The amount of "qualified tuition payments" is the amount of qualified college tuition expenses reduced by the amount of scholarships, grants and financial aid received. A "scholarship or grant" generally means an amount paid or allowed to, or for the benefit of, a student at an educational organization to aid him in pursuing his studies, and which is not required to be repaid. Amounts that must be subtracted from qualified college tuition expenses include any scholarship or grant which is excludable from gross income under § 117 of the Internal Revenue Code.
"Financial aid received" means financial aid similar to scholarships and grants received under an educational assistance program that is not includible in Massachusetts gross income, and is not required to be repaid. Any financial aid received must be subtracted from qualified college tuition expenses unless it falls within one of the exceptions detailed in this TIR.
For purposes of the college tuition deduction, "financial aid received" does not include the following items, and thus, these amounts are not required to be subtracted from the amount of qualified college tuition expenses in determining the amount of qualified tuition payments:
(a) any loans which must be repaid by the student or the student's parents,
(b) work-study funds which require employment by the student,
(c) any gift, bequest, devise, or inheritance within the meaning of § 102 of the Internal Revenue Code,
(d) veteran's education and training allowances,
(e) an education award provided to a participant in the AmeriCorps National Service Program, and
(f) any amounts of employer-provided educational assistance that are included in the taxpayer's Massachusetts gross income. (2)
A typical financial aid award for a student's overall cost of college attendance consists of a combination of amounts that do not have to be repaid, e.g. scholarships and grants, and loans or work-study funds that require either repayment or employment. To determine the amount of qualified tuition payments, the total amount of scholarships and grants is first allocated to qualified tuition expenses. Thus, the amount of qualified tuition payments is derived by subtracting the amount of scholarships and grants from the amount of tuition and mandatory fees.
Example: The total estimated college expenses for a student total $13,600, consisting of $4,000 for tuition and mandatory fees, $5,000 for room and board, $600 for books and supplies, $1,700 for personal expenses, $1,100 for transportation, and $1,200 for medical expenses. The student received a financial aid package consisting of a scholarship of $1,000, a grant of $1,500, and $11,100 in student loans. The amount of qualified tuition expenses is the amount of tuition and mandatory fees, $4,000. The amount of qualified tuition payments is $1,500, determined by subtracting the amount of scholarships and grants, $2,500, from the amount of qualified tuition expenses, $4,000.
For qualified tuition payments to be deductible, payments must be for college tuition of the taxpayer or a dependent of the taxpayer. An individual is a dependent of the taxpayer if he or she qualifies as a dependent under G.L. c. 62, § 3(B)(b)(3). This section references I.R.C. § 151(c) which provides the federal exemption deduction for a qualified dependent.
Because the Massachusetts personal income tax law references the Internal Revenue Code as of January 1, 1988, it adopts the version of I.R.C. § 151(c) and the definition of the term "dependent" found in I.R.C. § 152 as of that date. In the case of student dependents, for taxable years after December 31, 1988, the current Code imposes an age restriction on the availability of the dependency exemption for children who are students. For federal purposes, taxpayers cannot claim a dependency exemption for students who are 24 years of age or older. However, Massachusetts follows the Code as it existed before the age restriction was imposed. Thus, for Massachusetts purposes, taxpayers may claim an exemption for a student dependent without regard to the student's age, if the student otherwise qualifies for the exemption.
A taxpayer making college tuition payments who seeks to claim the deduction must first calculate Massachusetts adjusted gross income (MAGI) (3) using the worksheet contained in the instructions to Form 1 or Schedule NTS-L-NR/PY on Form 1-NR/PY. Only the aggregate amount of qualified college tuition payments made by the taxpayer for himself and his dependents in excess of 25% of his MAGI is deductible. On a joint return, the 25% MAGI threshold is based on the total Massachusetts adjusted gross income of both husband and wife.
7. Determining the Amount of the Deduction Against Part B Income
The college tuition deduction can only be used against Part B adjusted gross income which consists of such items as wages, pensions, rents, and Massachusetts bank interest. For tax year 1997, Part B income is subject to tax at the rate of 5.95%.
Computation of the amount of the college tuition deduction is a three step process. The first step is to compute the amount of qualified tuition payments which is the amount of qualified college tuition expenses paid on account of the taxpayer or a dependent less the amount of scholarships, grants and similar financial aid received attributable to such tuition. The second step is to calculate the amount of the taxpayer's Massachusetts adjusted gross income (MAGI) which is then multiplied by 25% to determine the floor for deductibility of qualified tuition payments. Under the third step, the amount of the college tuition deduction is determined by subtracting the floor amount of 25% of MAGI from the amount of qualified tuition payments.
If the qualified tuition payments are less than 25% of the taxpayer's MAGI, then no portion of the tuition payments are deductible. Any amount of tuition payments which do not qualify for deduction in the current taxable year are lost and may not be carried forward.
Example: During the tax year, Mary Jones has Massachusetts adjusted gross income (MAGI) of $15,000 as determined from the MAGI worksheet contained in the instructions to Form 1. Mary is enrolled as an undergraduate business student in a four year college with a cooperative work experience component. Mary's tuition and mandatory fees for the year total $16,000. Mary's expense for room and board is an additional $8,500. Mary has a combination of scholarships and grants totaling $7,000 from the university and the federal government. Mary also has student loans totaling $6,000 for the year. For purposes of the college tuition deduction, Mary's qualified tuition expenses are limited to the $16,000 paid for tuition and mandatory fees. No portion of the amount paid for room and board qualifies for the college tuition deduction. The amount of qualified tuition expenses must be reduced by the amount of scholarships and grants of $7,000. No reduction is required for the $6,000 received in the form of student loans which Mary must repay. The amount of qualified tuition payments is $16,000 - $7,000 = $9,000. The floor for the college tuition deduction is 25% of MAGI, or 25% of $15,000 = $3,750. Thus, Mary may deduct $5,250 which is the excess of $9,000 over $3,750.
Example: Barbara and Tom Smith are residents whose income includes $10,000 of interest and dividends (Part A income), and $60,000 salary (Part B income). Assuming no § 2 deductions, their combined MAGI on their joint return is $70,000 and the 25% floor for qualified tuition payments is $17,500. Assuming no scholarships, if the Smiths make $20,000 in qualified tuition payments for their dependent children in college, they can deduct $2,500 from their $60,000 Part B adjusted gross income. It should be noted that the college tuition deduction can only be used against Part B adjusted gross income. There is no deduction allowable against the Smith's $10,000 Part A income.
8. Double Tax Benefits Not Allowed
Where a taxpayer makes qualified tuition payments to a college for the taxpayer's dependent, and both the taxpayer and his or her dependent file Massachusetts income tax returns, only the individual actually making the payments to the college is entitled to claim the deduction. In no case may a deduction for the same tuition expenses be taken by both the taxpayer and his or her dependent on both their individual income tax returns. However, the taxpayer and his or her dependent can each claim a deduction with respect to the portion of qualified tuition payments actually made by each person to the extent that the payments of each exceed 25% of his MAGI.
The deduction is allowable only with respect to qualified college tuition expenses actually paid by the taxpayer during the taxable year, regardless of when the expenses were incurred and regardless of the method of accounting employed by the taxpayer in making his income tax return. Thus, if the tuition expenses are incurred but not paid during the taxable year, no deduction for such expenses are allowed for such year.
Qualified college tuition expenses paid with the proceeds of a loan are eligible for the college tuition deduction in the tuition payment year, not the year the loan is repaid.
10. TIN Requirement
No deduction will be allowed to a taxpayer with respect to the qualified tuition payments of an individual unless the taxpayer includes the social security number of such individual on the tax return. In addition, the taxpayer must specify the name(s) of all eligible educational institutions.
11. Nonresidents and Part-Year Residents
Nonresidents and part-year residents are entitled to claim the amount of the college tuition deduction attributable to Massachusetts source income. Nonresidents and part-year residents, in calculating MAGI for purposes of determining whether they qualify for the college tuition deduction, must determine MAGI as if they were a resident for the entire taxable year. MAGI is calculated on Schedule NTS-L-NR/PY of Form 1-NR/PY.
Nonresidents must multiply the amount of qualified tuition payments in excess of 25% of MAGI, computed as if the taxpayer had been a resident for the entire taxable year, by the ratio found on line 14g of Form 1-NR/PY. The allocation ratio for nonresidents is the amount of Massachusetts source income divided by the Massachusetts gross income, determined as if the taxpayer had been a resident for the entire taxable year.
Example: Charles Lee is a nonresident student attending college in Massachusetts. He earns $20,000 in Massachusetts source income. Since he has no other income from other sources, his MAGI is also $20,000 and his nonresident ratio is 100%. For 1997 he paid tuition and mandatory fees of $16,000, and received a scholarship of $2,000. The 25% MAGI floor for the college tuition deduction is $5,000. Subtracting the scholarship of $2,000 from the qualified college tuition expenses of $16,000 yields $14,000 in qualified tuition payments. The amount of the college tuition deduction for Charles is $14,000 - $5,000 = $9,000.
Part-year residents must multiply the amount of qualified tuition payments in excess of 25% of MAGI, computed as if the taxpayer had been a resident for the entire taxable year, by the ratio found on line 2 of Form 1-NR/PY. The allocation ratio for part-year residents is the number of days spent as a resident of Massachusetts divided by 365.
Example: Mark Davis, a New York resident in 1997, earns a total of $80,000, of which $20,000 is from employment in Massachusetts. He paid $17,000 in qualified college tuition expenses for his dependent son in 1997. Assume Mark has only Part B income, no § 2 deductions, and his only § 3 deduction is the college tuition deduction. First, calculate MAGI, as if Mark had been a resident for the entire taxable year, which is $80,000. The floor for Mark's college tuition deduction is 25% of MAGI, or 25% of $80,000, which is $20,000. Since Mark's qualified tuition payments of $17,000 are less than the "floor" amount of $20,000, Mark is not entitled to deduct any part of the college tuition payments he made in 1997.
12. Married Filing Separately
Where husband and wife elect to file separate returns, they have separate MAGI for purposes of the college tuition deduction. The person taking the deduction must be the one enrolled in college.
(4) under I.R.C. § 152, he or she can claim the deduction to the extent that the qualified tuition payments made for the dependent child by that parent exceed 25% of his or her separate MAGI. It is not required that the taxpayer also claim the dependency exemption for the child on his or her individual tax return in order to claim the college tuition deduction. This rule also applies if both husband and wife are making tuition payments for a child or children. However, it is important to note that if both are making tuition payments, the 25% MAGI floor applies to husband and wife separately, and any amount of qualified tuition payments below 25% of MAGI of each parent is disallowed.
13. Divorced Parents
Where parents are divorced and one parent pays the qualified college tuition expenses of a child and the other parent claims the dependency exemption, the parent who pays the child's college tuition expenses is eligible to deduct qualified tuition payments, provided the other requirements of the deduction are met.
Commissioner of Revenue
January 21, 1998
1. Educational institutions eligible for participation in the federal Department of Education student aid programs are defined by reference to section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088). Such institutions generally are accredited post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, or another recognized post-secondary credential. In addition, certain for-profit institutions and post-secondary vocational institutions are eligible for federal financial aid programs. (return to text)
2. The current Internal Revenue Code allows employees to exclude from federal gross income amounts received from employers under employer-provided educational assistance programs. See I.R.C. § 127. However, because Massachusetts adopts the Code as amended and in effect on January 1, 1988, this exclusion is not available for Massachusetts income tax purposes. See TIR 90-4. Thus, amounts employees receive from their employers under employer-provided educational assistance programs must be included in Massachusetts gross income under G.L. c. 62, § 2(a). (return to text)
3. Massachusetts adjusted gross income (MAGI) is an intermediate figure between Massachusetts gross income and Massachusetts taxable income. Massachusetts gross income is divided into three categories of income: Part A income, Part B income and Part C income. Deductions are treated separately for each class. Adjusted gross income for each class means the gross income minus the deductions allowed by section 2 of Chapter 62, but not the deductions allowed by section 3 of chapter 62. MAGI is the sum of Part A adjusted gross income, Part B adjusted gross income and Part C adjusted gross income. G.L. c. 62, § 2(i). (return to text)