Paying for College: Education Tax Breaks

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If you or a dependent are attending college, you know how costly a higher education has become. But did you know that there are tax breaks available to help lower that cost? Not all eligible taxpayers take full advantage of them. If you are eligible for education tax credits or deductions, by all means, use them.
Tax credits reduce the amount of taxes you are required to pay. An education tax credit indirectly helps lower the overall cost of your education by reducing the amount of tax you owe on your tax return. If you take a tax credit, and that credit reduces your tax to less than zero, you may even receive a refund. On the other hand, deductions reduce the amount of income on which you must pay taxes. Either way, these tax breaks lower your financial burden, so look into your eligibility for claiming one or more of them. Don’t miss out on this excellent way to reduce the amount you have to pay for college expenses.
Tax Credits
For taxpayers who paid education-related expenses in 2014, there are two main tax credits you might be eligible for: the American Opportunity Tax Credit and the Lifetime Learning Credit. Taxpayers can only take one of the two available credits. If you are eligible for both, maximize your benefit and take the one that is more favorable to you.

  • American Opportunity Tax Credit (AOTC)
    • The student must be enrolled at least part-time.
    • You must have spent funds on eligible expenses – books, supplies, tuition and fees.
    • The amount of credit you can take decreases as your income increases.
    • The AOTC is worth up to $2,500, per year, per student, for the first four years of college.
  • Lifetime Learning Credit (LLC)
    • This credit can be used whether you are taking undergraduate, graduate or professional degree courses.
    • There is no limit on the number of years you can claim the credit.
    • You don’t have to be working toward a degree to be eligible for this credit. For example, you can be enrolled in a course needed to acquire or improve your job skills.
    • The LLC is worth a maximum credit of up to $2,000 per tax return.
    • As with the AOTC, the amount of credit you can take with the LLC starts to phase out as your income increases.

Besides tax credits, there are also a couple of deductions that might benefit some taxpayers. The first deduction is for tuition and fees. You may be able to deduct these education expenses paid for yourself, your spouse or your dependent. There is also a deduction allowed for paying interest on a student loan. In the same year you can take both, the tuition and fees deduction, and the deduction for paying interest on student loans. Finally, workers may be able to claim a deduction for expenses paid for work-related education.

  • The Tuition and Fees Deduction
    • You can claim this deduction if you paid qualifying education expenses, no need to itemize to claim this deduction.
    • There are eligibility limits based on the amount of your income.
    • This deduction could reduce the amount of taxable income by up to $4,000.
  • The Student Loan Interest Deduction
    • No need to itemize to use this deduction.
    • The interest you paid had to have gone toward a qualifying student loan.
    • This deduction could reduce the amount of taxable income by up to $2,500.
  • Business Deduction for Work-Related Education
    • You will have to be working while going to school, and you will have to itemize your deductions.
    • The education expense you incurred must have been required, either by your employer or by the law, to keep your job.
    • The education must either maintain or improve your skill to perform your present job.

Other tax breaks may be available to you, depending on your situation. For example, tax advantages are available via 529 plans or savings bonds used for college. States, state agencies, and educational institutions can sponsor a 529 plan, a long-term program that invests college savings. A few states will allow you to make contributions to a 529 plan until April 15, 2015, and still take a tax break for the 2014 tax year. If you redeem bonds to pay college tuition, you may not have to pay tax on the interest earned.
529 College-Savings Plan

  • You either pre-pay or contribute to an account for a student’s qualified education expenses.
  • There is no income limit for contributors.
  • Plan earnings are neither subject to federal tax, nor usually, to state tax, as long as the withdrawals are used for college expenses.

Savings Bonds and College Expenses

  • You have to redeem I or EE bonds that were issued after 1989, and use them to pay for college tuition.
    There are income limits to qualify for this tax break.
  • The bond owner must have been at least 24 years old when the bond was issued. That means the bonds generally must be owned by a parent or relative, not by the child going to college.

If you have not filed your taxes yet, it’s not too late to take advantage of tax breaks. When it comes to lowering costs for education, saving every penny matters. Failing to use a tax advantage is like leaving money on the table. It’s worth taking the time to find out which tax breaks are available, and which you may be eligible to claim on your return. To find out more, you can consult your tax advisor or visit the IRS website.

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