As the April 15 deadline for filing tax returns approaches,
there are a number of tax breaks regarding education parents and
students can use to their advantage.
As the April 15 deadline for filing tax returns approaches, there are a number of tax breaks regarding education parents and students can use to their advantage.
The two most commonly used are federal tax credits under the Hope credit and the Lifetime Learning credit, both passed in 1997. The Hope credit offsets up to $1,500 per student tuition and fees for the first two years of higher education. The Lifetime Learning credit offsets up to $1,000 per tax return tuition for junior and senior years or courses taken to hone job skills. Both have annual income limitations – $41,000 to $51,000 for singles and $82,000 to $102,000 for married couples.
“The hard part is having too much income,” said Larry Snyder, an enrolled agent tax preparer in Tres Pinos.
Tax legislation in 2001 has attempted to ease the burden of school costs as Congress has taken into account two-wage earner families and increased the income limitations.
“It’s the best thing I’ve seen for middle-income, double-wage earners with kids in college,” said Barbara Andres, CPA and partner with Bianchi, Lorincz and Company. “… (The total income allowed) was so low, (the tax breaks) weren’t really helping people.”
There’s also a Tuition and Fees credit that allows for a deduction of up to $3,000 for tuition and fees, with a maximum income of $65,000 for singles and $130,000 for married couples. Andres said this can help to a degree.
“It’s a step in the right direction, but it still can be very difficult for families to send students to even state schools,” she said.
For example, if a family’s income is less than $130,000 and they’re paying $15,000 for school and they’re using the $3,000 Tuition and Fees credit, depending on their tax bracket, they could get as little as $1,000 deducted from their taxes, Andres said.
“That’s not enough,” she said.
One problem with tax law is that has failed to take into account inflation, Andres said. During the next five years, the amount of money that can be put away into education will slowly increase, she said.
One tax break that is becoming a better deal, according to Andres, is the Student Loan Interest deduction. This allows for a deduction of up to $2,500 and applies to college and graduate students. This can apply to the student or parent, depending on who holds the loan. The maximum income is $50,000 to $65,000 for singles and $100,000 to $130,000 for married couples.
A relatively new way to pay for college is the Coverdell Education Savings Account. The federal plan allows contributions to increase tax free as long as withdrawals are spent on education expenses. This year, the amount taxpayers could contribute to the account increased from $500 to $2,000. Also this year, there is an expansion in the school expenses that qualify, which include expenses related to grade and high school. These can include tuition, uniforms, transportation and computers. Previously, the plan only applied to college and graduate school.
“This will really benefit in the future,” Andres said. “What’s nice is that you can use it for elementary and high school education. It’s for people who would like to send their children to private schools.”
Another benefit to the plan is that the maximum income is $95,000 to $110,000 for singles and $190,000 to $220,000 for married couples.
Along the same lines, the 529 plan is offered by the state. The state-sponsored tuition plan gives taxpayers tax-free earnings on investments spent on education for college and graduate school with no income limit.
Education-related tax breaks should not be substituted for college savings, Andres said.
“Having a college savings is the most painless way to do it (paying for college),” she said. “Parents need to start planning early for children.”
Deciding which tax break is right for each taxpayer can be tricky since laws prohibit combining the benefits for the same student in the same year.
For more information, go to www.irs.gov.
Education Tax Breaks
Hope credit
Benefit: $1,500 per student credit for tuition and fees
Applies to: First and second year of college
Maximum income: Phases out at $41,000 to $51,000 for singles; $82,000 to $102,000 for married couples
Lifetime Learning Credit
Benefit: $1,000 per family credit for tuition and fees
Applies to: College, graduate school and courses that improve job skills.
Maximum income: Phases out at $41,000 to $51,000 for singles; $82,000 to $102,000 for married couples
Tuition and Fees credit
Benefit: Deduction up to $3,000 for tuition and fees
Applies to: College, graduate school.
Maximum income: $65,000 for singles; $130,000 for married couples
Student Loan Interest
Benefit: Deduction up to $2,500
Applies to: College, graduate school
Maximum income: Phases out at $50,000 to $65,000 for singles; $100,000 to $130,000 for married couples
Coverdell Education Savings Account
Benefit: Tax-free earnings on investments spent on education
Applies to: Kindergarten through 12th grade, college and graduate schools
Maximum income: Phases out at $95,000 to $110,000 for singles; $190,000 to $220,000 for married couples
State-sponsored Tuition Plan (529 plan)
Benefit: Tax-free earnings on investments spent on education
Applies to: College and graduate school
Maximum income: No limit
Source: IRS
