Education Tax Benefits

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The federal government offers several tax benefits for pursuing a college education including tax credits, tax deductions, and exclusions from gross income:

  • Hope Tax Credit: You may be able to claim a federal individual income tax credit of up to $1,650 for qualified tuition and related expenses for each eligible student.
  • Lifetime Learning Tax Credit: You may be able to claim a federal individual income tax credit of 20 percent of the first $10,000 of qualified and related expenses you pay for your family.
  • Tuition and Fees Deduction: You may be able to deduct qualified tuition and related expenses even if you do not itemize deductions on Schedule A, Form 1040.
  • Student Loan Interest Deduction: You may be able to deduct up to $2,500 of the interest you paid on student loans on your federal individual income tax return.
  • Employer Provided Educational Assistance: You may receive up to $5,250 in tax free education benefits from your employer each year.
  • Coverdell Education Savings Account: Earnings grow tax-free until withdrawn to pay for qualified education expenses.
  • Qualified Tuition Program: Earnings are tax-free while invested and tax exempt when withdrawn for qualified higher education expenses.

For additional information on education tax benefits, see Internal Revenue Service Publication 970. Also see the IRS frequently asked questions on education tax credits.

There are several other tax provisions that may help your family cover the cost of higher education:

  • Grants and scholarships are usually excluded when calculating the gross income of the student.
  • If an individual receives debt forgiveness following graduation, the recipient doesn’t have to report the amount of the forgiveness as income in certain cases.
  • If a college or university reduces the tuition charged or pays the tuition of the immediate family of an employee, that tuition reduction or tuition payment doesn’t count as income.

Also keep the following in mind as you explore education tax benefits:

  • The definitions of qualified college costs differ. This means that although one savings or investment option can be used to pay the cost of books or room and board, another might not allow it.
  • Each tax benefit option has different phase-in and phase-out periods as well as varying income eligibility requirements.
  • Some tax provisions can’t be used together in the same tax year, so families may need to choose between incentives.