Deductions May Reduce Education Costs

Did you know there are tax benefits for students enrolled in higher education? The Hope Scholarship, Lifetime Learning Credit, tuition and fees tax deduction, student loan interest deducation, and withdrawals from IRAs may be ways for your or your parents to take advantage of tax benefits while you're in school. You can find out more about educational tax benefits by obtaining the IRS Publication 970, "Tax Benefits for Education" at www.irs.ustreas.gov.

What are the tax benefits for students?

To make postsecondary education more affordable, The Taxpayer Relief Act of 1997 provided for Hope Scholarships, Lifetime Learning Credits, and other tax benefits for students and parents. These benefits were enhanced as part of the Economic Stimulus Bill of 2009. Whether you or your parents take advantage of these benefits depends on individual circumstances. The following information is not to intended to be considered as tax advice or counsel, but to help you to initiate conversations with your tax advisor.

The Hope Scholarship*
A credit against tax paid or owed, this Hope Scholarship helps to make the first two years of postsecondary education more affordable. For the 2008 tax year, taxpayers may be eligible for a tax credit of 100 percent of the first $1,200 of qualified education expenses paid, plus 50 percent of the second $1,200 paid. Students must be in the first or second year of postsecondary education and enrolled in a program that leads to a degree or certificate. The Economic Stimulus Bill of 2009 may extend this benefit to non-taxpayers and may increase the amount.

The Lifetime Learning Credit*
A credit against tax paid or owed, the Lifetime Learning Credit benefits students who are not able to claim the Hope Scholarship. A family may claim up to 20 percent of the first $10,000 of qualified expenses for all students ($2,000) per tax year. The credit may be claimed for the taxpayer, spouse and any dependents. Taxpayers who claim the tuition and fee deduction may not also claim the Lifetime Learning Credit. The Economic Stimulus Bill of 2009 may extend this benefit to non-taxpayers and may increase the amount.

Tuition and Fees Tax Deduction*
Up to $4,000 of tuition and fees may be deducted from the gross income of taxpayers who do not qualify for the Hope Scholarship or Lifetime Learning Credit. The deduction may be taken for tuition and fees required for attendance at a postsecondary institution and may be taken even if the taxpayer does not itemize deductions.

Student Loan Interest Deduction
A student loan borrower may take a tax deduction for interest paid in the tax year. This deduction can be taken even if the taxpayer does not itemize deductions. The maximum deduction is $2,500.

Withdrawals From IRAs
Students and their parents can take withdrawals from IRAs without penalty when the funds are used for qualified education expenses.

*There are income limits to these benefits. You should consult with the Internal Revenue Service (IRS) or a tax advisor to obtain more information.