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. Effective for tax years beginning on or after January 1, 2004, an above-the-line deduction of up to $4,000 is allowed on the federal return for higher education expenses. Therefore, if a taxpayer qualifies under Section 222 of the Internal Revenue Code to claim the deduction for higher education expenses on Line 34 of Federal Form 1040, but elects to claim the 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 claims a Hope tax credit of $1,500 in lieu of the deduction, the taxpayer is entitled to a $4,000 deduction on line 47 of the North Carolina return.

Last modified on: 01/02/08 03:27:35 PM.