Tuition and Fees Deduction
The computation of North Carolina taxable income for individuals begins with federal adjusted gross income. The federal deduction for qualified tuition and related expenses that had expired after tax year 2011, was extended by the American Taxpayer Relief Act of 2012 (ATRA); H.R. 8; P.L. 112-240, until December 31, 2013, retroactively for tax year 2012. A deduction of up to $4,000 is allowed on the federal return for higher education expenses.
For tax year 2012, the North Carolina General Assembly enacted legislation, House Bill 82, S.L. 2013-10, that conforms to the federal provision regarding the federal deduction for qualified tuition and related expenses. Therefore, those taxpayers who claim this federal deduction in computing adjusted gross income will receive the benefit of that federal deduction because adjusted gross income is the starting point on the North Carolina individual income tax return. No additional deduction may be claimed on the State return for those taxpayers who claim the federal deduction for tuition and fees.
North Carolina law (G.S. 105-134.6(d)(2)) allows a deduction for the amount of the taxpayer’s deductions that were not allowed under the Internal Revenue Code because the taxpayer elected to claim a federal tax credit in lieu of the deduction. Therefore, if a taxpayer qualifies under Section 222 of the Internal Revenue Code to claim the 2012 deduction for higher education expenses on Line 34 of federal Form 1040, but elects to claim the American Opportunity, Hope, or Lifetime Learning credit with respect to the same expenses in lieu of the deduction, a deduction from federal taxable income is allowable on the North Carolina return for such expenses. For example, if a taxpayer qualifies for a deduction of $4,000 on the federal return but, instead, claims the American Opportunity tax credit in lieu of the tuition and fees deduction, the taxpayer is entitled to a State deduction of $4,000 on line 49 - Other Deductions From Federal Adjusted Gross Income, of the 2012 North Carolina individual income tax return.
For tax year 2013, North Carolina will not conform to the federal provision allowing the tuition and fees deduction. S.L. 2013-10 requires an addition to adjusted gross income for the amount of the taxpayer’s deduction for qualified tuition and related expenses under section 222 of the Code. Likewise, there will no longer be a deduction available on the 2013 North Carolina income tax return for taxpayers who claim the American Opportunity, Hope, or Lifetime Learning credit on the federal return in lieu of the tuition and fees deduction as a result of the law change to G.S. 105-134.6(d)(2) included in S.L. 2013-10.