Education Tax Benefits

by Mark Kantrowitz, Publisher of FinAid.org and FastWeb.com
Education Tax Benefits

Many families overlook the education tax benefits. These are tax credits and exclusions from income that are claimed on your federal income tax return. While they don't provide money up front, they can give you a little money back on your taxes based on amounts you paid for certain college expenses, such as tuition and fees.

The Hope Scholarship Tax Credit, Lifetime Learning Tax Credit and Tuition and Fees Deduction overlap and you can use only one of them. But choosing among them is much easier, ever since the American Recovery and Reinvestment Act of 2009 expanded the Hope Scholarship tax credit. If you are an undergraduate student, the Hope Scholarship tax credit will probably give you the most money. If you are a graduate or professional student or don't qualify for the Hope Scholarship, use the Lifetime Learning tax credit. The Tuition and Fees Deduction is mainly useful if you need to reduce your adjusted gross income a little in order to qualify for other benefits.

The Hope Scholarship provides a federal income tax credit of up to $2,500 per student based on the first $4,000 in postsecondary tuition, fees and course materials paid by the taxpayer during the tax year. The Hope Scholarship tax credit is 100% of the first $2,000 and 25% of the second $2,000. The Hope Scholarship is partially refundable (40%), meaning you can get up to a $1,000 refund even if you do not owe any federal income taxes. The tax credit is limited to the first four years of postsecondary education. It has the highest income phaseouts of any of the education tax benefits and is not subject to the Alternative Minimum Tax (AMT).

The Lifetime Learning Credit provides a federal income tax credit of up to $2,000 per taxpayer (not per student) based on the first $10,000 in postsecondary tuition and fees paid by the taxpayer during the tax year. The Lifetime learning tax credit is 20% of the first $10,000. The tax credit may be received for an unlimited number of years.

With the Tuition and Fees Deduction, taxpayers may deduct up to $4,000 in tuition and fee expenses as an above-the-line exclusion from income. This deduction may be taken even if the taxpayer does not itemize.

The coordination restrictions (also known as "anti-double-dipping rules") prevent you from claiming more than one of these education tax benefits. You also can't use a college savings plan distribution (including distributions from 529 plans, prepaid tuition plans and Coverdell Education Savings Accounts) to pay for the education expenses, as the tax-free status of the distribution means you would be double-dipping. But you can use student loans or cash to pay for the expenses.

In addition to the three main education tax benefits, there are two other important tax provisions for education:

  • Student Loan Interest Deduction. Borrowers of federal and private education loans may deduct up to $2,500 in interest as an above-the-line exclusion from income. This deduction may be taken even if the taxpayer does not itemize.
  • Employer Tuition Assistance. Your employer may provide you with up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year.

Mark Kantrowitz is an expert on paying for college. He is publisher of FinAid.org and Fastweb.com, the leading free web sites for information about student financial aid, student loans and scholarships.

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