Federal Tax Incentives for Education-related Expenses
According to the Department of Education’s Federal Student Aid page, the following are available this tax season for your consideration…
Hope Credit
- Tax credit is up to $1,500/year for each eligible student.
- 100% tax credit for the first $1,500 paid for qualified expenses. 50% tax credit for the second $1,000.
- You may claim Hope Credit for two years. Student must be in first or second year and enrolled at least half time for one period of the tax year.
- Covers tuition and fees.
- You qualify by paying tuition and fees for yourself (if independent), your spouse or your dependent child.
- Student activity fees, athletic fees and other expenses do not count toward your credit.
- Grants and scholarships will reduce the tuition and fees used to determine your credit.
- Eligibility decreases for Modified Adjusted Gross Incomes (MAGIs) between $43,000 - $53,000 (filing single) and $87,000 - $107,000 (filing jointly married). Can't claim MAGIs above these limits.
- You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.
- No felony drug conviction on student's record.
Lifetime Learning Credit
- May claim up to $2,000/year in federal taxes.
- 20% tax credit for the first $5,000 paid for qualified expenses. After 2002, a 20% tax credit on the first $10,000 paid.
- No limit on number of tax years you may claim Lifetime Learning Credit.
- Covers tuition and fees.
- Available for all years of post-secondary education and to students taking individual classes to improve job skills.
- You qualify by paying tuition and fees for yourself (if independent), your spouse or your dependent child.
- Student activity fees, athletic fees and other expenses do not count toward your credit.
- Grants and scholarships will reduce the tuition and fees used to determine your credit.
- Eligibility decreases for Modified Adjusted Gross Incomes (MAGIs) between $43,000 (filing single) and $107,000 (filing jointly married). Can't claim MAGIs above these limits.
- You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.
- Student doesn't need to be pursuing a degree or other recognized credential.
- Felony drug conviction rule doesn't apply.
Student Loan Interest Deduction
- Parents and independent students may deduct interest on loans borrowed to meet college expenses.
- Deduction is for interest payments made during the first 60 months (five years) in which interest payments are required.
- Deduction diminishes for Modified Adjusted Gross Income (MAGIs) of $55,000 (single filers) and $105,000 (married, filing jointly). Cannot deduct if income is above these amounts.
- Maximum deduction in 2001 and beyond, $2,500.
- You aren't required to itemize to receive the deduction.
- Dependents may not claim the deduction.
- Married couples must file jointly to receive the deduction.
Using IRA Withdrawals for College Costs
- You may withdraw from an IRA to pay higher education expenses for yourself, your spouse, your child or grandchild.
- You will owe federal income tax on the amount withdrawn, but won't be subject to the 10% early withdrawal penalty.
Read more about these and other tax incentives on the Department of Education’s Federal
Student Aid site at https://studentaid2.ed.gov/getmoney/save_for_college/save_tax.html.
Check with the campus Financial Aid Office or your tax advisor to see how these tax incentives may apply to you and your family.