Tax Credits

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IRS Tax Benefits for Education

There are tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. A tax credit reduces the amount of income tax you may have to pay. Unlike a tax deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself.
Certain borrowers can receive a tax deduction for the interest actually paid on student loans for post-secondary education expenses.

There are three college-related tax credits – the Hope Scholarship Tax Credit, the American Opportunity Tax Credit which modifies and expands the Hope Credit, and the Lifetime Learning Credit. There is one tax deduction – the tuition and fees deduction. You may only claim one credit or deduction in any given year. There is also Employer-Provided Educational Assistance, a qualified program in which your employer pays for a portion of your tuition, fees and similar expenses tax-free.

Review the options below to determine which if any you or your family may qualify for:

The Hope Scholarship: provides a federal income tax credit of up to $2,500 (40% refundable) per student based on the first $4,000 in post-secondary tuition, fees and course materials paid by the taxpayer during the tax year. The tax credit was limited to the first two years of postsecondary education, but the American Opportunity Credit has expanded that to four post-secondary education years. You or your family must file a federal tax return and owe taxes to qualify for this tax credit.

Information obtained July 17, 2013 from http://www.irs.gov/publications/p553/ch01.html#en_US_publink1000168349

The American Opportunity Credit: modified the existing Hope credit by adding required course materials to the list of qualifying expenses, and by allowing the credit to be claimed for four post-secondary education years instead of two. This makes it available to a broader range of taxpayers. The maximum annual credit is up to $2,500 per student, and is available to individuals whose modified adjusted gross income does not exceed $80,000 ($160,000 for married couples filing a joint return).

Information obtained July 17, 2013 from http://www.irs.gov/uac/American-Opportunity-Tax-Credit and http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers

The Lifetime Learning Tax Credit: provides a federal income tax credit of up to $2,000 per taxpayer based on the first $10,000 in postsecondary tuition and fees paid by the taxpayer during the tax year. The Lifetime learning tax credit is 20% of the first $10,000. The tax credit may be received for an unlimited number of years.

Student Loan Interest Deduction: Borrowers of federal and private education loans may deduct up to $2,500 in interest as an above-the-line exclusion from income if their modified adjust gross income is less than $75,000 ($155,000 if filing a joint return). This deduction may be taken even if the taxpayer does not itemize.

Information obtained July 17, 2013 from http://www.irs.gov/publications/p970/ch04.html

Employer Tuition Assistance: Your employer may provide you with up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year. The benefits must have been paid for tuition, fees, books, supplies, and equipment. Travel, lodging and meals are not included. Also, your employer should not include those benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Information obtained July 17, 2013 from http://www.irs.gov/publications/p970/ch11.html

While SchoolBound strives to provide you with the most current information, due to its dynamic nature we strongly advise you visit www.irs.gov at least once a year to review the most current criteria for each of these education tax benefits.

Tax BenefitMaximum BenefitQualified Expenses
Hope Scholarship Tax Credit– Up to $2,500 tax credit per eligible student
– 40% of credit may be refundable
Tuition, fees and course materials
American Opportunity Credit– Up to $2,500 tax credit per eligible student
– 40% of credit may be refundable
Tuition, required enrollment fees, required course materials (including books, supplies and equipment needed for a course of study)
Lifetime Learning Tax Credit– $2,000 tax credit 20% of first $10,000Tuition and fees
Student Loan Interest Deduction– $2,500 exclusion from incomeStudent loan interest
Employer Tuition Assistance– $5,250 exclusion from income per studentTuition, fees, books, supplies, equipment