With the rising cost of education, many families are wondering how they can afford it. The Internal Revenue Service wants to help, and offers various credits and deductions that can be used to offset some of these costs in the form of tax savings.
Recovery Act Benefits
The American Recovery and Reinvestment Act (ARRA) of 2009 has brought about many changes in our tax system. The change that directly affects education has been the modification of the existing Hope Credit. The hope credit has changed many times over the years; however, it has become a staple for families to rely on for help with college expenses. This credit is used to directly offset your tax liability, the same as if you paid the funds directly to the IRS. It is designed to help with the first four years of education, and limits the total credit by the amount of qualified education expenses you paid during the year and the current cap on the credit.
Lifetime Learning Credit
The Lifetime Learning Credit is another one that has undergone many changes over the years; however, it remains available for families to use. This credit is not limited to four years, as is the Hope Credit. It is available for an unlimited number of years and can be used to acquire or improve job skills. The Hope and Lifetime Learning Credits are not allowed to be claimed in the same year, so you will need to determine which is the most beneficial for you to use. This credit is also limited by the current cap and the total qualified education expense you paid during the year.
Tuition and Fees Deduction
The tuition and fees deduction is different from the credits listed above, as it is designed to directly reduce your taxable income. It is an adjustment to income on the front page of your 1040 tax return for all expenses paid up to the current limits of this deduction. While it is not as effective as a credit, it still helps alleviate the bottom line, which is your tax bill.
Student Loan Interest
When students borrow money to help fund their education, the interest incurred from these loans is deductible. This deduction is limited by the amount you have incurred, and is phased out according to certain adjusted gross income requirements. This is to say that, as your income is increased, your deduction is reduced.
Coverdell Education Savings
The Coverdell Education Savings is designed for families with children under the age of 18, and is used as a tax-planning tool, rather than an immediate deduction for educational expenses. No deduction is allowed for the contribution to the program; however, the account is allowed to grow tax-free. As long as the distributions do not exceed the qualified education expenses, the proceeds will remain untaxed.