As the unofficial end of summer nears (Labor Day) and school begins, thought I'd strike while the iron is hot and offer several of the tax benefits available for (mostly) higher education. Our most excellent resource on this topic is IRS Publication 970 , Tax Benefits for Education, as it provides a comprehensive look at things from the American Opportunity Credit to the Student loan interest deduction. Here's a look at some of what's available to you:
- The American Opportunity Credit is available for the first four years of post-secondary education and is around, as the law stands now, through 2012. It is worth up to $2,500 per qualifying student (you or your dependent(s) on your tax return) and up to $1,000 is refundable, meaning you could get that much in the form of a refund even if you owe no taxes. Complete details on all the requirements you would need to satisfy in order to claim it, click here .
- Coverdell Education Savings Accounts or ESA's are accounts that can help you finance qualified educational expenses for a beneficiary. There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. More on Coverdells is here.
- The lifetime Learning Credit is available for all years of postsecondary education and for courses to acquire or improve job skills. It can be worth up to $2,000 per eligible student. Full details on it are here .
- Qualified tuition programs (QTPs) are also called “529 plans.” A QTP is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. More on these plans from IRS Pub 970 can be found here.
- Scholarships and fellowships. The tax treatment of scholarships and fellowships depends on things like expenses paid and whether you are (the recipient is) a degree candidate. Here is where you can find complete details for taxes on them...along with grants and tuition reductions.
- Student Loan interest deduction. Student loan interest is basically interest paid during the year on a qualified student loan. If your income is below a certain level ($150,000 if a married filing joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2011. Also, the student loan interest deduction is taken as an adjustment to income and this means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). More on the student loan interst deduction is here.
Keep in mind that tax credit reduces the amount of income tax you may have to pay and a deduction generally reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay. Also, certain savings plans (coverdell, for example) allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both. And finally, an exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.
Besides IRS Pub 970, our Tax Benefits for Education: Information Center webpage is also an excellent resource.