The Internal Revenue Code (IRC), contains provisions that may provide tax savings to individuals and families who pay higher education expenses. Certain of these tax credits and other benefits are subject to adjusted gross income limitations and may be phased out at higher income levels. Types of tax benefits that are currently available include:
The Hope CreditThe Hope Credit is a "below-the-line" tax credit based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. This credit may be available each year for each dependent student in your family. Your family may be able to claim it for up to two years per student. The following qualifications must be met:
The student is a freshman or sophomore in college.
The student is enrolled in a recognized educational credential program, or in a program that leads to a degree or certificate.
The student is enrolled in at least half of the normal full-time course load in their major field of study for at least one academic period during the calendar year.
The student has not been convicted of any felony for possessing or distributing a controlled substance.
You cannot claim both the Hope Credit and the Lifetime Learning Credit for the same student in the same year. Only one of these credits can be used per student per tax year.
The Lifetime Learning CreditThe Lifetime Learning Credit is calculated on a per tax return, rather than a per student basis. You may be eligible to claim a Lifetime Learning Credit for qualified education expenses incurred for you, your spouse or a dependent you claim as an exemption. There is no limit on the number of years in which the Lifetime Learning Credit may be taken. If both the taxpayer and student file separate tax returns, only one is allowed to claim the credit for qualified education expenses for that student.
Comparison of Education Tax Credits
| Hope Scholarship | Lifetime Learning |
| Available only until the first 2 years of post-secondary education are completed. | Available for all years of post-secondary education and for courses to acquire or improve job skills. |
| Student must be pursuing a undergraduate degree or other recognized education credential. | Student does not need to be pursuing a degree or other recognized education credential. |
| Student must be enrolled at least half-time for at least one academic period that begins during the tax year. | Half-time enrollment minimum is not necessary. The credit is available for one or more courses. |
| Credit is not allowed if felony drug conviction exists on student's record. | Felony drug conviction rule does not apply. |
A taxpayer is permitted to take only one of the credits - either Hope or Lifetime Learning - per dependent student per year.
Tuition and Fees DeductionYou may be eligible to receive a tax deduction for qualifying tuition and fees expenses. If a tax deduction is used, a tax credit cannot be taken for the same qualifying education expenses. Consult your tax advisor for specific details.
Student Loan Interest DeductionA deduction for student loan interest may be available to you if you paid interest on qualifying student loans during the tax year. The deduction may be claimed even if the taxpayer does not itemize deductions. To qualify for this deduction, you must have used the proceeds from the loans for qualified education expenses, which include tuition, room, board, fees and supplies incurred while you, your spouse or your dependent attended school at least half-time in a degree, certificate or other recognized education credential program.
| Student Loan Interest Deduction at a Glance | |
| Feature | Description |
| Loan Qualifications |
Your student loan:
|
| Student Qualifications |
The student must be:
|
| Phase-out | The amount of interest that is deductible for a taxpayer depends on the modified adjusted gross income indicated on the taxpayer's tax return. The deduction is phased out completely at higher income levels. |
To encourage savings for future education expenses, Congress created Coverdell Education Savings Accounts (ESAs) in which annual contributions can grow tax-free and those earnings can then be withdrawn when needed for the student beneficiary's education expenses. Contributions to an ESA can be made on behalf of a child under age 18. Contributions are not tax deductible but withdrawals can be made tax-free if used to pay for eligible education expenses.
529 College Savings PlanSection 529 Plans are state college savings programs, including pre-paid tuition plans, that allow funds to grow federally tax-free for the purpose of paying for certain future post-secondary education expenses. Plan funds may be used to pay for tuition, fees, supplies, books and certain room and board costs. Programs are administered by a state agency, an organization designated by the state such as an investment company, or an eligible educational institution, and may offer benefits to both the contributor and the beneficiary. Plans differ from state to state. Most states offering prepaid tuition contracts covering in-state tuition will allow you to transfer funds from your account to both private and out-of-state schools. If you decide to use a college savings plan, generally, the full value of your account can be used at any accredited college or university in the country. Withdrawals taken from 529 Plans to pay for a beneficiary's qualified education expenses are free from federal income tax.
Employer-Provided Education AssistanceIf you receive educational assistance benefits from your employer, the IRS allows you to exclude them from taxable earnings up to the IRS maximum allowable amount. The exemption applies to both undergraduate and graduate level courses and, subject to certain exceptions, does not have to be for work-related courses.
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