You can save money as you pay for college if you know the tax benefits.
As education costs continue to rise, it's important to know the Federal Government offers certain tax benefits for higher education. The links below highlight the available tax credits, deductions and other benefits available for the 2009 tax year.
For more information, please consult your tax advisor. Additional information is available at irs.gov. You may also call the IRS with your tax questions at 800.829.1040.
American Opportunity Credit
Hope Credit
Lifetime Learning Credit
Student Loan Interest Deduction
Tuition and Fees Deduction
Coverdell Education Savings Account
IRA Withdrawals
Employer-Provided Education Benefits
529 Plans
Education Savings Bonds
Business Deduction for Work-Related Education
American Opportunity Credit
Under the American Recovery and Reinvestment Act (ARRA), a new tax credit, the American Opportunity Credit, modifies the existing Hope Credit for tax years 2009 and 2010. A credit of up to $2,500 can be claimed for qualified tuition and related expenses incurred during the first four years of post-secondary education for each eligible student. Taxpayers can receive a tax credit based on 100% of the first $2,000 plus 25% of the next $2,000 of tuitions, fees and course materials paid during the taxable year. For each student, you can choose to claim only one eligible tax credit (American Opportunity, Hope, or Lifetime Learning) in the same year. However, if you choose the Hope Credit for any student you cannot claim the American Opportunity Credit for another student on the same tax return.
Eligibility requirements include:
- The student must be enrolled at least half-time in a degree or certificate-granting program.
- The student must be free of any felony conviction for possessing or distributing a controlled substance.
Taxpayers with a modified adjusted gross income (MAGI) of less than $80,000 (or $160,000 for married taxpayers filing jointly) may be eligible for the full credit. The credit is gradually reduced for eligible taxpayers with MAGI between $80,000 and $90,000 (or between $160,000 and $180,000 for married taxpayers filing jointly).
Hope Credit
The American Opportunity Credit has replaced the Hope Credit for most taxpayers. However, a larger Hope Credit is available for students attending an eligible school in a Midwestern disaster area. This Hope Credit may be claimed for qualified tuition and expenses that have been paid for each eligible student, for up to two tax years. Students must be enrolled at least half time for at least one academic period beginning during the year. The amount of the Hope Credit is 100% of the first $1,200 ($2,400 if a student in a Midwestern disaster area) plus 50% of the next $1,200 ($2,400 if a student in a Midwestern disaster area) paid for the student's qualified tuition and related expenses. The maximum amount for the Hope Credit a family can claim annually is $1,800 ($3,600 if a student in a Midwestern disaster area) — multiplied by the number of eligible students. If you choose the Hope Credit for any student you cannot claim the American Opportunity Credit for another student on the same tax return.
Eligibility requirements are as follows:
- You must claim the Hope Credit for at least one student attending an eligible institution in a Midwestern disaster area and choose not to claim the American Opportunity Credit for any student for 2009.
- The student must be in the first or second year of a degree or certificate-granting program and must be attending school at least half time.
- The student must be free of any felony conviction for possessing or distributing a controlled substance.
Taxpayers with incomes below $50,000 (or $100,000 for married taxpayers filing jointly) may be eligible for the full credit. The credit is gradually reduced for eligible taxpayers with incomes between $50,000 and $60,000 (or between $100,000 and $120,000 for married taxpayers filing jointly).
Lifetime Learning Credit
A taxpayer may receive a tax credit for 20% of the first $10,000 (up to $2,000) of qualified tuition and fees paid out-of-pocket for all eligible students in the family. For students attending an eligible school in a Midwestern disaster area, the credit is increased to 40% of qualified expenses paid (up to $4,000). This credit is based on a per family basis, not a per student basis. Either the parent or the student, but not both, may claim the credit for the student's expenses in a given year. Unlike the Hope Credit, this credit can be claimed for an unlimited number of years; however, if you claim the Lifetime Learning Credit, you cannot claim the American Opportunity or Hope Credit for the same student in the same year.
Taxpayers with incomes below $50,000 (or $100,000 for married taxpayers filing jointly) may be eligible for the full credit. The credit is gradually reduced for eligible taxpayers with incomes between $50,000 and $60,000 (or between $100,000 and $120,000 for married taxpayers filing jointly).
Student Loan Interest Deduction
The tax code allows taxpayers who have student loans to deduct interest they pay on those loans for themselves, their spouses, or their dependents. Taxpayers may deduct interest paid on qualifying student loans, up to $2,500. To qualify:
- The student loan must have been taken out solely to pay qualified education expenses, and cannot be from a related person or made under a qualified employer plan.
- The student must be you, your spouse, or your dependent and must be enrolled at least half-time in a degree program.
Taxpayers with incomes below $60,000 ($120,000 for married taxpayers filing jointly) may be eligible for the full deduction. The deduction is reduced for taxpayers with incomes between $60,000 and $75,000 ($120,000 and $150,000 for married taxpayers filing jointly).
Tuition and Fees Deduction
Taxpayers may take a deduction for qualified higher education expenses. These expenses include tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution. The maximum deduction is $4,000 per year.
A taxpayer may not take the Tuition and Fees Tax Deduction if he or she also claims tuition and fee expenses under the American Opportunity Credit, Hope Credit, Lifetime Learning Credit, or other provision for educational expenses paid in the same year. However, a family may claim this deduction along with an American Opportunity, Hope, or Lifetime Learning Credit, as long as the same student is not used as the basis for each deduction, credit, or exclusion and the family does not exceed the Lifetime Learning maximum per family.
Taxpayers with incomes below $65,000 (or $130,000 for married taxpayers filing jointly) may be eligible for the full deduction. For taxpayers with incomes between $65,000 and $80,000 (or $130,000 and $160,000 for married taxpayers filing jointly), the deduction is reduced to $2,000.
Coverdell Education Savings Accounts
Taxpayers may deposit up to $2,000 per year into a Coverdell Education Savings Account (ESA) for a child under age 18.* Anyone may contribute to the Coverdell ESA, provided the total contributions for the child do not exceed the yearly limit. Contributions are not tax-deductible, but the funds grow tax-free. Withdrawals from a Coverdell ESA may be used in the same year with an American Opportunity, Hope, or Lifetime Learning Credit, provided the withdrawal is used for different qualified expenses.
Eligible taxpayers with incomes below $95,000 (or $190,000 for married taxpayers filing jointly) may be eligible to contribute the full $2,000. The contribution limit is gradually reduced for eligible taxpayers with incomes between $95,000 and $110,000 (or between $190,000 and $220,000 for married taxpayers filing jointly).
IRA Withdrawals
Taxpayers may withdraw funds from an existing individual retirement account (IRA) without penalty to pay qualified higher education expenses for the taxpayer, spouse, child, or grandchild. The taxpayer will owe federal income tax on the amount withdrawn but will not be subject to the 10% early withdrawal tax. The early withdrawal tax would apply only to any of the withdrawn money that may exceed the qualified expenses.
Employer-Provided Education Benefits
Employer-provided educational assistance may be excluded from an employee's income. This provision may be applicable whether or not the education is job-related. Employees may exclude up to $5,250 of employer-provided education benefits from their taxable income, and the benefits apply for either undergraduate or graduate level courses.
529 Plans
A qualified tuition program, or 529 Plan, may be established by a state or by educational institutions such as public or private colleges. Distributions are tax-exempt unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Withdrawals from a 529 Plan may be used in the same year with an American Opportunity Credit, Hope Credit, or Lifetime Learning Credit, provided that the withdrawal is used for different qualified expenses.
Visit 529 College Savings Plan to learn more.
Education Savings Bonds
The interest on Series EE bonds issued after 1989 and Series I bonds may be excluded from gross income if the taxpayer uses that interest for qualified higher education expenses during the redemption year. Contributions to a 529 Plan or a Coverdell ESA may be included as a qualified expense. Any qualified expense that is used to claim an American Opportunity Credit, Hope Credit, or Lifetime Learning Credit may not be included.
Taxpayers with incomes below $69,950 (or $104,900 for married taxpayers filing jointly) may be eligible for the full interest exclusion. The exclusion is gradually reduced for eligible taxpayers with incomes between $69,950 and $84,950 (or between $104,900 and $134,900 for married taxpayers filing jointly).
Business Deduction for Work-Related Education
Taxpayers may deduct the cost of qualifying work-related education, such as tuition, books, supplies, and certain travel costs, as business expenses if the required education serves a legitimate business purpose:
- Required by the taxpayer's employer or the law to keep the taxpayer's present salary, status, or job
- Maintains or improves skills needed in the taxpayer's present work
This deduction is limited to 2% of the taxpayer's adjusted gross income. An additional limit may apply for adjusted gross incomes greater than $166,800.
This information on this page is not intended or written by SunTrust to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax-related penalties.