Tax Breaks for Education Expenses
The tax law is filled with breaks to help taxpayers pay for education -- for your children, your grandchildren or even for yourself.
The tax law is filled with breaks to help taxpayers pay for education -- for your children, your grandchildren or even for yourself. After all, the lawmakers' thinking might go, the smarter and better trained a citizen is, the more likely he or she will make more money ... for the government to tax. Offering tax incentives for education could be the epitome of a win-win deal. Be smart and take advantage of all the breaks you can.
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What's Deductible? -- A to Z
American Opportunity credit. Through 2012, the Hope college credit has been modified and renamed the American Opportunity Credit. While the Hope college credit was worth up to $1,800 a year for each student for each of the first two years of college, the American Opportunity Credit is worth up to $2,500 for the first four years of college. The credit usually is claimed by the parent of the student. The American Opportunity credit phases out income rises between $80,000 and $90,000 on single returns and between $160,000 and $180,000 on joint returns.
Coverdell Education Savings accounts. These accounts used to be known as education IRAs, even though they have nothing to do with retirement. You cannot deduct what you contribute to a Coverdell account, but earnings are tax free if the money is used to pay college costs or expenses for elementary and secondary school education. This includes private and parochial schools. Up to $2,000 can be contributed to a beneficiary's account per year. You cannot contribute to a Coverdell if your adjusted gross income is over $110,000 if you are single or over $220,000 if you are married and file a joint return.
Education IRA. See Coverdell Education Savings account.
Education savings bond. See Savings bond interest.
Elementary and secondary education. Most tax breaks are aimed at job-related training or college education. But funds that grow tax free in a Coverdell Education Savings Account can be used to elementary- and high-school expenses, even for the cost of a computer and educational software for the student.
Exchange student. If you provide a home for an exchange student, you may qualify to deduct $50 a month as a charitable contribution.
Employer-paid education. Up to $5,250 of non-job related education paid for by your employer is a tax-free fringe benefit, even graduate-level courses. Schooling that is job related does not count against the $5,250 cap.
529 plans. See State college savings plans.
HOPE credit. The Hope college credit does not exist for 2010, 2011 or 2012. It is replaced by the more generous American Opportunity Credit.
Interest on Series EE Bonds cashed to pay for education. See Savings bond interest.
IRA withdrawals for education. A taxpayer under age 59½ can avoid the 10% penalty on IRA distributions used to pay higher education expenses for his or herself, a spouse or a dependent. However, the payout from a traditional IRA and any earnings that come out of a Roth IRA before age 59½ would still be taxed.
Job-related education. The cost of education that maintains or improves skills you use on the job -- or that is required to maintain your job -- is deductible if you itemize. It's a miscellaneous expense, which means you get a tax benefit only if all your miscellaneous deductions exceed 2% of your adjusted gross income. Education that qualifies you for a new trade or business, such as law school, is not eligible for this break.
Lifetime Learning credit. This credit picks up where the American Opportunity credit ends, after the first four years of college. It applies to tuition for graduate-level courses and continuing education courses. The credit is 20% of the first $10,000 of tuition, for a maximum of $2,000 per tax return. This credit phases out gradually as adjusted gross income rises between $50,000 and $60,000 for singles and between $100,000 and $120,000 for married couples.
Roth IRA. Because Roth IRA contributions can be withdrawn any time tax- and penalty-free, this retirement savings account can be a powerful college-savings tool. Over ten years, for example, parents could contribute a total of up to $100,000 to Roth IRAs, and it could all be withdrawn tax- and penalty-free to pay college bills. Earnings could be withdrawn penalty-free to pay education bills, too, although taxes would be due on that amount ... unless the parents were over 59½ at the time, in which case the earnings would be tax free, too
Savings bond interest. Interest on Series EE savings bonds bought after you turn 24 can be excluded from income if the proceeds are used to pay college costs for yourself, your spouse or a dependent. If you are married filing jointly, the right to this break on 2010 returns starts to phase out when adjusted gross income exceeds $105,100 and is completely phased out after $135,100. For singles and heads of households, the 2010 phase-out zone starts at $70,100 and is capped after $85,100.
Scholarships. In most cases, scholarships you receive from an institution of higher learning are tax free.
State college-savings plans. State-college savings plans (often called "529 plans" after the section of the tax law that authorizes them) allow you to save money tax-free to pay for college. Although contributions are not deductible on your federal return, many states permit residents to deduct contributions on state returns.
Student loan cancellation. Generally, if a loan is canceled, the debtor is required to report the forgiven amount as taxable income. But this rule does not apply to the cancellation of student loans that include a provision for forgiving all or part of the loan if you work for a certain amount of time in a certain profession. Before you report any student loan cancellation as income, check to see if it may be tax-free.
Student loan interest. You can deduct up to $2,500 of student loan interest paid during the year, assuming you are not being claimed as a dependent on your parents' tax return. This write-off is available regardless of whether you itemize. If your parents paid interest on a loan for which you were liable, they can't claim the deduction, but you may qualify to do so. The right to claim this deduction phases out as income rises from between $120,000 and $150,000 on joint returns filed by married couples and between $60,000 and $75,000 on returns filed by single people.
Travel as education. Congress has brought an end to an education write-off that had the aura of an awfully sweet deal. Before the crackdown, it was possible for a French teacher to deduct the cost of a trip to France to maintain general familiarity with the language and culture, for example, or for a social studies teacher to write off the cost of a trip to another state to learn about and photograph its people and geography for use in the classroom. No more. The law now bars the deduction for the cost of travel when the travel itself is the educational activity.
Tuition deduction. If your income is too high to qualify for the American Opportunity or Lifetime learning credit, you can deduct up to $4,000 of college tuition expenses paid for you, your spouse or a dependent. The deduction is available even if you do not itemize. The write-off drops to $2,000 if your adjusted gross income exceeds $65,000 on a single return or $130,000 on a joint return; it disappears all together if when income passes $80,000 on a single return or $160,000 on a joint return.
Tuition reduction plans. Most employees of educational institutions who receive tuition reduction for themselves, their spouse or dependents can treat the value as a tax-free fringe benefit.
See our other taxopedias.