Federal Tax Benefits
The following is a brief description of federal tax benefits such as credits, deductions, and savings incentives available for parents and students. Income limitations and tuition expenses will be adjusted for inflation. This information does not constitute legal or tax advice. Please consult with a tax professional to discuss your personal situation and any changes or revisions to the tax law. You can also find more details in IRS Publication 970.
What is it?
A tax credit that provides a maximum allowable credit of $1,650 per student for each of the first two years of post-secondary education.
Hope Tax Credit is not available to married taxpayers who file separate returns.
Income Limits
Taxpayers with a modified adjusted gross income (MAGI) of less than $57,000 (less than $114,000 if married and filing jointly).
The allowable amount of the credits is reduced for taxpayers who have a MAGI above certain amounts.
The phase-out of the credits begins for most taxpayers when MAGI reaches $47,000; the credits are completely phased out when MAGI reaches $57,000. For joint filers, the phase-out range is $94,000 to $114,000.
Enrollment Status
The student must be enrolled at least half-time in a degree or certificate program.
Benefits
This credit initially allows taxpayers a 100-percent credit per eligible student for the first $1,100 of qualified tuition and related expenses (but not room, board or books) and a 50-percent credit for the second $1,100 of qualified expenses paid.
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Lifetime Learning Tax Credit
What is it?
A tax credit that provides a maximum allowable credit of $2,000 per student per year. This credit is available for all years of postsecondary education and for courses to acquire or improve job skills.
Lifetime Learning Tax Credit is not available to married taxpayers who file separate returns.
Income Limits
Taxpayers with a modified adjusted gross income (MAGI) of less than $57,000 (less than $114,000 if married and filing jointly).
The allowable amount of the credits is reduced for taxpayers who have a MAGI above certain amounts.
The phase-out of the credits begins for most taxpayers when MAGI reaches $47,000; the credits are completely phased out when MAGI reaches $57,000. For joint filers, the phase-out range is $94,000 to $114,000.
Enrollment Status
The student may be enrolled in an eligible postsecondary institution, or in any course of instruction at an eligible school to improve or acquire job skills.
The student does not need to be pursuing a degree or other recognized education credential.
Benefits
This credit is computed as 20% of the first $10,000 paid in tuition and eligible class fees. Room and board, transportation, etc., are not covered. Differing from the Hope Credit, the Lifetime Learning Credit is calculated per taxpayer, not per college student. This means that the maximum credit a taxpayer may claim for a taxable year is $2,000, no matter how many students are in the household.
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Student Loan Interest Deduction
What is it?
A tax deduction of up to $2,500 of the interest paid on eligible student loans each year (including interest paid on spouse’s or child’s eligible education loans).
The deduction will reduce the amount of the income that may be taxed by up to $2,500. The deduction can be claimed even if federal tax returns are not itemized.
This deduction is not available to married taxpayers who file separate returns.
Income Limits
Taxpayers with a modified adjusted gross income (MAGI) of less than $70,000 (less than $140,000 if married and filing jointly).
The allowable amount is gradually reduced for those with incomes between $55,000 - $70,000 ($110,000 - $140,000 if filing jointly).
Enrollment Status
The student must have been enrolled at least half time in a degree program during the time of the loan.
Benefits
The maximum deduction is $2,500.
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Tuition and Fee Deduction
What is it?
A tax deduction of up to $4,000 for tuition and fees from taxable income if the taxpayer is not eligible for the Hope or Lifetime Learning tax credits.
Itemization is not necessary to take advantage of this tax benefit, but Form 1040 or 1040A must be filed.
This deduction is not available to married taxpayers who file separate returns.
Income Limits
Taxpayers with a modified adjusted gross income (MAGI) of no more than $65,000 (no more than $130,000 if married and filing jointly) may deduct up to $4,000.
Those with incomes of more than $56,000 (more than $130,000 if married and filing jointly) but not more than $80,000 ($160,000 if married and filing jointly) may deduct up to $2,000.
Enrollment Status
The student must be enrolled in at least one course at an eligible postsecondary institution.
Benefits
Depending on the taxpayer’s income, up to $4,000 of qualified tuition and fees may be deducted.
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Coverdell Education Savings Account
What is it?
A savings account that lets families invest up to $2,000 per child per year. No contributions can be made to a Coverdell account after the beneficiary reaches age 18, unless he or she is a special needs beneficiary.
Amounts deposited in the account grow tax free until distributed. If distributions from an account are not more than the beneficiary's qualified education expenses, the withdrawals are tax-free.
Income Limits
Taxpayers with a modified adjusted gross income (MAGI) of less than $110,000 (less than $220,000 if married and filing jointly) can contribute to a Coverdell account.
Enrollment Status
Tax-free withdrawals for qualified higher education expenses can be made when the beneficiary is enrolled at an eligible postsecondary school.
Benefits
Total contributions for the beneficiary in any year cannot be more than $2,000.
The amount of withdrawals in a year cannot be more than actual qualified college costs.
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529 College Savings Plans (Qualified Tuition Plans)
What is it?
Many states and educational institutions allow taxpayers to prepay or contribute to a tuition savings account on behalf of a student. No tax is due on a distribution from a 529 plan unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. There are no income restrictions on the individual contributors. Other terms and features include:
Annual contributions of more than $12,000 ($24,000 if contributing with a spouse) are subject to the gift tax.
Each state determines its own lifetime contribution limit.
If money is taken out of a 529 plan for purposes other than education, the parents will be charged a 10 percent penalty on the earnings and have to pay federal taxes on the earnings.
Contributions can be made to both a Coverdell account and a 529 plan for the same beneficiary in the same year.
Income Limits
There are no income limits.
Enrollment Status
The beneficiary must be taking at least one course at an eligible postsecondary institution to take tax-free withdrawals.
Benefits
Contributions and earnings grow tax-free and no federal taxes are paid when the money is withdrawn for qualified education expenses.
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