Tax Benefits


	NOTE: The following is for informational purposes only. This information should not be relied on for tax planning, preparation, or filing. Consult a tax professional for assistance or refer to Publication 970, Tax Benefits for Education for more information.

Tax Benefits of Higher Education

Hope Credit
Lifetime Learning Credit
Tuition & Fee Deductions
Student Loan Interest Deductions
Coverdell Education Savings Accounts
IRA Withdrawals
Qualified Tuition Programs

Hope Credit

You can claim a Hope Credit only for an "eligible student." An "eligible student" is a student who:

As of the beginning of the year, has not completed the first two years of post-secondary education (that is, generally is a freshman or sophomore in college).
Is available only until the first 2 years of post-secondary education are completed
Is enrolled in a program that leads to a degree, certificate, or other recognized educational credential, for at least one academic period beginning during the year.
Is taking at least one-half of the normal full-time workload for the student's course of study for at least one academic period beginning during the calendar year, and
Is free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the year.

An eligible student can be you, your spouse, or your dependent for whom you claim an exemption. The maximum Hope Credit is $1,800 (100% of the first $1,100 of eligible expenses and 50% of the next $1,100 expenses; limit is $3,600 for students in a Midwestern disaster area) for each eligible student.

The Hope Credit is gradually reduced if your modified adjusted gross income is between $48,000 and $58,000 ($96,000 and $116,000 in the case of a joint return) for 2008. The credit cannot be claimed if your modified AGI is $58,000 or more ($116,000 in the case of a joint return). Students in a Midwestern disaster area are eligible for an increased Hope Credit. Learn more here.

Lifetime Learning Credit

You are allowed a Lifetime Learning Credit of 20% of the first $10,000 you paid for qualified tuition and related expenses for yourself, your spouse, or your dependent for whom you claim an exemption. The maximum amount of credit you can claim for 2008 is $2,000 (20% of $10,000) for all students in the family. Students in a Midwestern disaster area are eligible for an increased Lifetime Learning Credit. Learn more here.

The Lifetime Learning Credit is not based on the student's workload. It is allowed for one or more courses that the student takes at an eligible educational institution. The credit is not limited to students in the first two years of post-secondary education. Expenses for graduate-level degree work are eligible. However, to be eligible for the credit, the student must be taking course work in order to acquire or improve job skills. There is no limit on the number of tax years for which the Lifetime Learning credit can be claimed for each student. The amount you can claim as a credit does not increase based on the number of students for whom you pay qualified expenses.

The Amount of the Lifetime Learning Credit is gradually reduced if your modified adjusted gross income is between $48,000 and $58,000 ($96,000 and $116,000 in the case of a joint return). The credit cannot be claimed if your modified AGI is $58,000 or more ($116,000 or more in the case of a joint return).

Tuition & Fee Deductions

Generally, you cannot deduct education and training expenses for yourself, your spouse (if married) or your dependent as a business expense unless the education or training:

Maintains or improves a skill required in a trade or business you are currently engaged in,
Meets the express requirements of your employer, or
Meets the requirements of law or regulations which are conditions of continuing your employment.

You may be able to deduct qualified education tuition and related expenses that you pay. You do not have to itemize to take this deduction. For tax year 2008, you can claim your education expenses either as an adjustment to income or as a Hope or Lifetime learning credit. Qualified expenses are the same as for the Hope and Lifetime learning credit. Refer to Publication 970, Tax Benefits for Education.

You cannot deduct higher education expenses on your income tax return and also claim a Lifetime learning credit based on those SAME expenses. Nor can you claim both the Hope and Lifetime learning credit in the same year for the same expenses.

The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 in 2008. This deduction is taken as an adjustment to income, which means you can claim this deduction even if they do not itemize deductions on Schedule A of Form 1040. This deduction may benefit taxpayers who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.

Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible postsecondary institution. Personal living and family expenses, including room and board, insurance, medical and transportation, are not deductible expenses.

The exact amount of the Tuition and Fees Tax Deduction depends on the amount of qualified tuition and related expenses paid for one's self, spouse, or dependent for whom the taxpayer can claim an exemption.

The amount of qualified education expenses that can be deducted through the Tuition and Fees Deduction remained level for the 2008 tax year at $4,000 for taxpayers with a Modified Adjusted Gross Income (MAGI) of $65,000 or less ($130,000 or less for married couples filing jointly). The maximum Tuition and Fees Deduction is $2,000 for taxpayers with a MAGI greater than $65,000 ($130,000 for married couples filing jointly), but not greater than $80,000 ($160,000 for married couples filing jointly). Taxpayers with a MAGI greater than $80,000 ($160,000 for married couples filing jointly) are not eligible for this deduction.

Students attending schools in a Midwestern disaster areas are subject to an expanded list of qualified education expenses.

Student Loan Interest Deductions

You may be able to deduct up to $2,500 for interest you pay in 2008 on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040 (PDF).

You cannot claim the deductions if:

Another taxpayer claims an exemption for you as a dependent,
Your filing status is married filing separately, or
You are not legally obligated to make payments on the loan.

A qualified student loan is a loan you took out to pay qualified expenses. The expenses must have been:

For you, your spouse, or a person who was your dependent when you took out the loan,
Paid or incurred within a reasonable time before or after you took out the loan, and
For education furnished during a period when the recipient was an eligible student.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. These costs include tuition, fees, room and board, books, equipment, and other necessary expenses, such as transportation.

Costs you incur have to be reduced by:

Non-taxable employer - provided assistance benefits,
Non-taxable distributions from an education IRA,
U.S. Savings Bond interest that is non-taxable because you paid qualified higher education expenses,
Qualified scholarships that are non-taxable,
Veterans educational assistance benefits, and
Any other non-taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

The student must have been enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution and must have carried at least one half of a normal full-time work-load for the course of study being pursued.

The deduction will start to be phased out when modified AGI is between $55,000 and $70,000 ($115,000 and $145,000 if married filing jointly or qualifying widow(er)). You cannot take a student loan interest deduction if your modified AGI is $70,000 ($145,000 if you file a joint return) or more.

If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E (PDF), Student Loan Interest Statement, from the financial institution, from a governmental unit (or any of its subsidiary agencies), from educational institutions, or any other person to whom you had paid student loan interest of $600 or more in the course of their trade or business.

Coverdell Education Savings Accounts

A Coverdell ESA is a trust or custodial account set up in the United States solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. The designated beneficiary must be under the age of 18 when the account is established. Any balance in a Coverdell ESA must be distributed within 30 days after the date the beneficiary reaches age 30. These age limits do not apply to beneficiaries with special needs.

There is no limit to the number of Coverdell ESAs that can be established for one beneficiary. However, total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2,000. The contributions are not tax deductible. For information on how to determine the part of any distribution that is taxable earnings, refer to Publication 970, Tax Benefits for Education.

Families of students killed in the line of duty may be eligible for additional benefits. Learn more here.

IRA Withdrawals

Withdrawals can be made from an IRA or the new Roth IRA by persons under the age of 59 1/2 without the 10% early withdrawal penalty if the funds are used to pay higher education expenses. Visit www.irs.gov/ for details.

Qualified Tuition Programs

Distributions from state tuition savings programs (typically referred to as 529 Savings Accounts) and prepaid tuition plans are tax-free for federal income tax purposes if withdrawals are used for qualified education expenses. An individual who establishes an account may select himself or herself as the account owner, designating the ability to control the account by selecting investment options, changing a beneficiary of the account, and approving distributions to the beneficiary. Refer to IRS publication 970 or inquire about tuition savings and pre-paid tuition plans offered in your state.