tax rewards for your college spending

Posted : January 3, 2006
Last Updated : February 11, 2014
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tax rewards for your college spending

There are numerous tax credits and tax benefits to help families manage the cost of higher education. Here is an overview of some of the programs available. 

American Opportunity Credit
The American Opportunity Credit provides a maximum allowable credit of $2,500 per eligible student for the first four years of post-secondary education, which includes any tax years a taxpayer claimed the Hope Scholarship Credit for that student. There are income requirements to obtain the credit. These income requirements vary year to year due to inflation. Please refer to IRS Publication 970 to get income requirements for the current year. American Opportunity Credit provisions include:

  • Available only for the first 4 years of postsecondary education. 
  • Available only for 4 tax years per eligible student (including any year(s) Hope Credit was claimed).
  • Student must be pursuing an undergraduate 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.
  • No felony drug convictions on student's record.

Lifetime Learning Credit
Up to $2,000 can be claimed as the Lifetime Learning Credit. This credit is computed as 20% of the first $10,000 paid in tuition and eligible class fees. Room and board, transportation, etc. are not covered. Differing from the American Opportunity Credit, the Lifetime Learning Credit is calculated per taxpayer, not per college student. This means that the maximum credit a taxpayer may claim for a taxable year is $2,000, no matter how many students are in the household. There are income requirements to obtain the credit. These income requirements vary year to year due to inflation. Please refer to IRS Publication 970 to get income requirements for the current year. Other Lifetime Learning Credit provisions include:

  • Available for all years of postsecondary education and for courses to acquire or improve job skills.
  • Available for an unlimited number of years.
  • Available for one or more courses.
  • Not denied due to a student's felony drug conviction.

For each student, a taxpayer can elect for any year only one of the credits mentioned above. For example, if a taxpayer elects to take the Lifetime Learning Credit for a child on his 2013 tax return, he cannot, for that same child, also claim the American Opportunity Credit for 2013. If a taxpayer pays qualified education expenses for more than one student in the same year, he can choose to take certain credits on a per-student, per-year basis. This means that a taxpayer can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for another student in the same year.

Student Loan Interest Deduction
Taxpayers who have taken loans to finance an education at an eligible institution (a university, college, vocational school, or other post-secondary school that is qualified to participate in federal student aid programs) may be qualified to deduct interest they pay on loans for themselves, their spouse or dependent. The maximum deductible amount of interest is $2,500. This tax credit also has income limitations, which vary year to year due to inflation (refer to IRS Publication 970). Terms of this program include:

  • Student loan must have been taken out solely to pay qualified education expenses, including tuition, fees, room and board, books, supplies, transportation, and other necessary expenses.
  • Loan cannot be from a related person or made under a qualified employer plan.
  • Student must be enrolled at least half-time in a degree program.
  • A taxpayer can deduct interest paid during the remaining period of the student loan.

Coverdell Education Savings Account
The Coverdell Education Savings Account lets families invest up to $2,000 per child per year. Contributions to a Coverdell account are not deductible, but amounts deposited in the account grow tax free until distributed. If distributions from an account are not more than the beneficiary's qualified education expenses, the withdrawals are tax-free. These accounts have income limits (refer to IRS Publication 970). Contribution provisions to these accounts include:

  • No contributions other than cash can be made to a Coverdell account.
  • No contributions can be made to a Coverdell account after the beneficiary reaches age 18, unless he is a special needs beneficiary.

Qualified Tuition Program (aka 529 Plan)
Certain states and educational institutions allow taxpayers to prepay or contribute to a tuition savings account on behalf of a student. No tax is due on a distribution from a 529 plan unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. There are no income restrictions on the individual contributors. Other terms and features include:

  • Contributions to a Qualified Tuition Program (QTP) on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. 
  • Contributions can be made to both a Coverdell account and a QTP for the same beneficiary in the same year.

For information on other programs that have tax benefits or for more specific information on the programs listed above, please refer to IRS Publication 970. If you have any questions about the programs, please consult a tax professional.

Information gathered from www.irs.gov.


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tax rewards for your college spending






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