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Jan 292013
 
 January 29, 2013  Posted by  College, Family, Hot Deals, Money
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If you have or soon will have college-age children, you may want to review information from the Internal Revenue Service (IRS) about income tax deductions and education credits for college tuition and other expenses. In addition to deductions and credits, special education savings plans allow accumulated interest to grow free of income tax until the money is used to pay for higher education.

Tax deductions

Tax deductions and education credits help taxpayers offset the cost of higher education by reducing the amount income tax you have to pay.

  • The Tuition and Fees Deduction available for qualified higher education expenses for an eligible student can reduce the amount of your taxable income by up to $4,000.
  • Student Loan Interest Deduction is available for interest paid on a qualified student loan during the tax year. It can reduce your taxable income by up to $2,500.

Education credits

Instead of these income tax deductions, you may be able to take one of these education credits for eligible expenses. Choose the deduction or credit that will give you the most income tax benefit.

  • American Opportunity Credit is available for the first four years of post-secondary education at an eligible institution. Qualified expenses include tuition and fees and course-related books, supplies and equipment. The maximum annual income tax credit is $2,500 per student.
  • Lifetime Learning Credit is available for any number of years for qualified expenses for students enrolled in eligible education institutions. You may be able to claim a lifetime learning income tax credit of up to $2,000 for qualified education expenses. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, only one type of education credit per student may be claimed in the same tax year.  Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course or those who are not pursuing a degree.

If you pay college expenses for more than one student in the same year, you can choose to take income tax credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for a second student.

Savings plans

  • 529 plans are education saving programs that allow taxpayers to either prepay or contribute to an account for qualified higher education expenses. These plans have become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not tax-deductible, the interest the account earns isn’t subject to federal tax if it is used toward qualified education expenses.

These income tax deductions, education credits and  savings plans for college tuition and other expenses are subject to limitations. For more information or to determine whether these tax benefits apply to you, visit Tax Benefits for Education, download Publication 970 at IRS.gov, or contact your local IRS office, or a certified tax advisor.

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Carole Cancler

Carole Cancler is a business and technology professional with experience in food science, technical writing, and product development. Her former company, Private Chef Natural Gourmet in Seattle, Washington specialized in frozen gourmet meals. Prior to that, Carole spent 11 years at Microsoft as a software engineer and program manager. Her writing expertise includes business intelligence, websites, newsletters, and recipe development. Currently, she focuses on writing and consulting for the food and technology industries and, for fun, teaches cooking classes. Her first cookbook, The Home Preserving Bible is available on Amazon. Carole owns and operates Greater Seattle on the Cheap.

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