TAX BREAKS FOR EDUCATION (IRS Publication 970)

Education Credits

Education credits can be claimed on your individual income tax return if you pay qualified education expenses for higher education for an eligible student whom is yourself, your spouse, or a claimed dependent.

Qualifying expenses for the education credits include expenses paid in the tax year for tuition to an eligible educational institution, as well as related expenses only if they must be paid to the institution as a condition of enrollment, such as required student activity fees, etc. (Note:  Qualified education expenses paid with the proceeds of a loan can also be used in claiming the credit.)

Education Credits include the Hope Credit and the Lifetime Learning Credit

Hope Credit

• Up to $1,500 credit for qualified education expenses for eligible students (100% of the first $1,000 of qualified education expenses plus 50% of the next $1,000 of qualified education expenses)
• Only for the first 2 years of post-secondary education
• Student must be pursuing an undergraduate degree or other recognized education credential
• Student must be enrolled at least half time for at least one academic period during the tax year
• Student’s record cannot contain felony drug convictions

Lifetime Learning Credit

• Up to $2,000 credit per return (20% of the first $10,000 of qualified education expenses)
• Available for all years of post-secondary education and for courses to acquire or improve job skills
• Not necessary for the student to be pursuing a degree
• Credit is available for one or more courses (no half time enrollment requirement)

Note:  You will not be able to claim the education credits if you are filing married filing separately or if your modified adjusted gross income is too high.  Please contact our office for the current phase-outs.  Only one of the above credits can be taken for the same student in a given year. 

Student Loan Interest Deduction

• Interest payments made on qualified student loans, as well as loan origination fees, can be deducted  on individual income tax returns over the term of the loan
• Qualifying loans include student loans taken out solely to pay qualified education expenses (includes tuition, room and board, books, supplies, equipment, transportation, etc.) and must be for yourself, your spouse, or a dependent and enrolled at least half-time in a degree program
• Your deduction amount depends on your income level (Please contact our office for the current phase-outs.)

Tuition and Fees Deduction

• Up to $4,000 reduction in income subject to tax
• Deductible expenses include tuition and fees required for enrollment at an eligible postsecondary educational institution, but not including personal living or family expenses (like room and board), and  must be paid for yourself, your spouse, or a dependent for whom you claim an exemption
• Deduction is available for one or more courses (no half time enrollment requirement)

Note:  You will not be able to claim this deduction if you are filing married filing separately or if your modified adjusted gross income is too high.  Please contact our office for the current phase-outs.  You can not take this deduction if you claimed one of the education credits described above.

Coverdell Education Savings Account (ESA)

• Savings account created to finance the qualified education expenses of a designated beneficiary including qualified higher education, elementary, or secondary education  expenses
• Account can be established at any bank in the United States for any beneficiary who is under 18 or is a special needs beneficiary
• Any individual, including the beneficiary, whose modified adjusted gross income is not too high can contribute to a Coverdell ESA
• Maximum contributions for a given year for a beneficiary is $2,000
• Distributions are tax free if they are not more than the beneficiary’s adjusted qualified education expenses for the year
• Qualified higher education expenses include tuition, fees, books supplies and equipment that are required for enrollment and room and board for students enrolled at least half-time up to the schools allowance for room and board or the actual amount charged if the student is residing in school owned housing
• Qualified elementary and secondary education expense include tuition and fees, books, supplies, equipment, and academic tutoring; room and board, uniforms, and transportation when required or provided by the school; and the purchase of computer technology, equipment, or Internet access if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in elementary or secondary school
• The balance in the account generally must be distributed within 30 days after the beneficiary reaches age 30 or in the event beneficiary’s death and balances can be transferred to other beneficiaries within 60 days of distribution if not used
• Contributions are not deductible, the earnings on the account grow tax free until distributed

Qualified Tuition Program (QTP) (Also known as Section 529 Plans)

• State program to allow you to prepay or contribute to an account for paying a student’s qualified education expenses
• No tax is due on distributions from a QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses
• Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment and reasonable costs of room and board for a student who is attending school at least half-time
• Contributions cannot be more than the amount necessary to provide for the education expenses of the beneficiary and there are no income restrictions on contributors
• Remaining balances can be transferred to other beneficiaries within 60 days of distribution if not used

Education Exception to Additional Tax on Early IRA Distributions

• You can avoid early withdrawal penalties on your IRA (10% additional tax on early distributions before the age of 59 ½ ) if you take the distributions for qualified education expenses for yourself, your spouse, or you or your spouse’s children or grandchildren
• Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment and reasonable costs of room and board for a student who is attending school at least half-time
• The amount of your IRA distribution that is not subject to the 10% additional tax includes the total qualified education expenses less any tax-free educational assistance received (like grants, scholarships, Coverdell ESA distributions, etc.)
• File IRS Form 5329 with your income tax return

 Education Savings Bond Program

• You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you pay qualified education expenses for yourself, your spouse, or a claimed dependent, if your modified adjusted gross income is not too high, and if your filing status is not married filing separately
• Qualified U.S. savings bonds include series EE bonds issued after 1989 or series I bonds and the owner must be at least 24 years old before the bond’s issue date
• Qualified education expenses include tuition and fees and contributions to qualified tuition programs or to Coverdell education savings accounts
• File IRS Form 8815 with your income tax return

Employer-Provided Educational Assistance

• Up to $5,250 of educational assistance benefits received from your employer under an educational assistance program can be excluded from your income tax return
• Educational assistance benefits include payments for tuition, fees, books, supplies, and equipment for undergraduate- or graduate-level courses

Business Deduction for Work-Related Education

• If you itemize deductions on your income tax return, you can deduct the costs of qualifying work-related education as business expenses if the education is required by your employer or the law to keep your present salary, status or job and/or if the education maintains or improves skills needed in your present work

Please note that the above is not complete information on the various tax benefits for education, but is provided as a summary of the avenues available to you.  Feel free to contact our office for additional information and assistance with education areas discussed above.  We would be happy to assist in your education planning and in determining the most advantageous education financing actions for you.

STUDENT AID INFORMATION AND RESOURCES

Free Application for Federal Student Aid (FAFSA)

U.S. Department of Education

www.fafsa.ed.gov

You must complete and submit the FAFSA to apply for federal student financial aid and to apply for most state and college aid.  Applications can be completed online or using the paper form.

Funding Education Beyond High School – A Guide to Federal Student Aid

U.S. Department of Education

http://studentaid.ed.gov/students/publications/student_guide/index.html

This guide informs you about forms of student aid such as grants, loans, and work-study and how to apply for them.

U.S. Department of Labor’s Occupational Outlook Handbook

www.bls.gov/oco

The handbook presents information about different occupations such as the necessary training and education, earnings, job responsibilities, working conditions, and information about the job market.

FinAid

www.finaid.org

FinAid is a free website available for students that provides information, advice, and tools for financial aid.

The site includes calculators geared at helping you determine how much your education will cost, the aid you will need, and how much will need to be saved. (www.finaid.org/calculators/)

Institute of Education Sciences National Center for Education Statistics

http://nces.ed.gov/ipeds/cool/

Presents information about higher education institutions, providing search methods by location, program or major, and institution characteristics.