The good news about the rising cost of higher education is that students and their families may take advantage of credits to offset expenses like tuition and fees. Liberty Tax Service reminds you that the deduction for college tuition and fees is available for filing a 2007 return. This can provide a deduction of up to $4,000 whether it’s taken for you, your spouse or dependent(s).
Calculate to see whether the college tuition and fees deduction, or the Hope or lifelong learning credit is the most advantageous, since you may claim only one. There are increases in the amounts deductible as educational credits. Students must be enrolled in a postsecondary educational program to qualify. Here’s the latest on tax breaks for educational expenditures:
Deduction for Tuition and Fees
Tuition you paid for yourself, your spouse, or a dependent to attend an eligible educational institution in 2007 qualify. The costs of books, supplies and equipment do not usually qualify, but may, if these purchases are required by and paid to the school in order to attend.
Hope and Lifetime Learning Credits
There are two nonrefundable tax credits for payments made for qualified tuition and related expenses for postsecondary education. Both the Hope and lifetime learning credits are subject to income phaseout levels.
The Hope credit is 100% of the first $1,100 of qualified education expenses and 50% of the next $1,100 qualified education expenses. There is a maximum credit of $1,650 per eligible student. The credit covers tuition, and certain related expenses at a college or institute of higher learning whose student aid program is administered by the Department of Education. It is available for the first 2 years of postsecondary education only.
The lifetime learning credit applies to 20% of qualified educational expenses not exceeding $10,000, for a maximum credit of $2,000 per tax return. The lifetime learning credit is available for all eligible students and all years of postsecondary education study at eligible educational institutions. It can also be used for courses taken to improve job skills, and not necessarily to get a degree.
The credits phase out if the taxpayer’s modified adjusted gross income (MAGI) is between $47,000 and $57,000 for single and head of household filers ($94,000 and $114,000 if married filing jointly). Taxpayers may claim either the Hope credit or the lifetime learning credit, but not both for the same student.
Student Loan Interest
Taxpayers repaying a student loan may qualify to deduct up to $2,500 of their student loan interest as an adjustment to income. This includes the amount paid for the loan origination fee, if applicable. Students are allowed to deduct all interest until the loan is paid off. The financial lender should issue Form 1098-E to report the interest on the student loan. The deduction phases out if the taxpayers modified adjusted gross income (MAGI) is between $55,000 and $70,000 for single and head of household ($110,000 and $140,000 if married filing jointly).
Coverdell ESAs
Planning ahead for the rising costs of higher education? Establish a Coverdell ESA for a designated beneficiary under 18, and your contributions grow tax deferred. You may contribute up to $2,000 per beneficiary each year to a Coverdell ESA through a bank or other approved financial institution. Contributions are not tax deductible.
Qualified Tuition Programs (QTPs) or 529 Plans
Parents can contribute funds to pay a future student’s qualified educational expenses through programs set up on a statewide basis. Although these contributions are not deductible on the federal return, many states allow for a deduction. No tax is due when a QTP distribution is used for qualified educational expenses unless the amount of the distribution exceeds the qualified educational expenses.
IRA Distributions
Taxpayers are allowed to take distributions from an IRA for qualified educational expenses such as tuition, fees, books, and supplies required for enrollment for yourself and family members, and not pay the 10% early withdrawal penalty.
Tax-free Scholarships, Fellowships and Veterans Aid for Education: If a student is a qualified candidate for a degree and spends funds received through scholarships and fellowships for qualified education expenses, they don’t have to pay taxes on their scholarships and fellowships. Keep a log of how these funds were used. Any veterans who receive scholarships for training administered by the Department of Veterans Affairs don’t have to pay taxes on these allotments. Pell grants fall under the criteria of scholarships.
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