There are several money-saving tax benefits available to taxpayers paying for higher education. Remember that a tax deduction reduces the amount of income subject to tax before the tax is determined. Tax credits reduce the amount of tax after the tax is calculated.
STUDENT LOAN INTEREST DEDUCTION
Borrowers paying interest on eligible student loans may deduct up to $2,500 of the interest paid. The loan must have been used to pay for a student's tuition and other higher education expenses. Eligible expenses include tuition, fees, room and board, books, supplies, equipment, and other expenses including transportation.
Hampshire College does not and cannot advise individual borrowers as to whether and how much in student loan interest they can deduct. To determine whether they can benefit from the deduction borrowers should consult a qualified tax advisor or accountant or contact the IRS directly.
TUITION and FEES DEDUCTION
You may be able to deduct the cost of higher education for yourself, your spouse, or a dependent, even if you do not itemize deductions on Schedule A, Form 1040. The Tuition and Fees Deduction can reduce the amount of your income subject to tax by up to $4,000.
THE HOPE SCHOLARSHIP CREDIT
You can receive a tax credit of up to $1,500 per eligible student for a taxpayer paying education-related expenses during a student's first two years of college. The amount of the credit depends on the annual income of the taxpayer. The student must be enrolled at least half-time in a degree or certificate program, not have completed the first two years of college, and not have any felony drug convictions. Qualified expenses include tuition, fees, books, supplies and equipment. Not included are room and board, transportation, and other living and medical expenses.
The student must be listed as a dependent on your return in order to claim the Hope Scholarship Credit. Since the Hope tax credit is figured per student, a taxpayer with two dependents enrolled in the first or second year of college may claim a credit for each dependent student.
LIFETIME LEARNING CREDIT
You may also claim a Lifetime Learning Credit of up to $2,000 after the first two years of college if you pay for the education-related costs. The credit amount depends on the income of the taxpayer. Eligible students must be enrolled in at least one course, but do not need to be pursuing a degree. This tax credit is equal to 20% of the first $10,000 of qualified expenses paid. Qualified expenses include tuition, fees, books, supplies, and equipment. Not included are room and board, and other living and medical expenses. A student must be listed as a dependent on your return in order to claim the credit. Keep in mind that this credit is figured on the basis of one credit per tax return, regardless of how many dependent students are involved and there is no limit on the number of years this credit can be claimed for each student.
OTHER TAX BENEFITS AVAILABLE
There are additional ways that one may use higher education expenses toward tax credits or tax deductions such as IRA withdrawals, employer-provided educational assistance, and Coverdell Education Savings Accounts.
To learn more about the information listed above, please contact the IRS directly or review the IRS Publication 970 on Tax Benefits for Education. The IRS may be contacted by phone at 800.829.3676 or review Publication 970 (pdf).