Tax Credits and Savings
A tax credit reduces the amount of federal taxes the taxpayer owes and could result in a larger refund. There are also additional tax code provisions that offer incentives for education.
The Hope Scholarship is actually a tax credit from the Internal Revenue Service (IRS), which is available for each student in a taxpayer's family. A tax credit reduces the amount of federal taxes the taxpayer owes and could result in a larger refund. The student must be attending at least half-time, must be in the first two years of their undergraduate program and must be seeking a degree or certificate. The amount claimed must be actual out-of-pocket expenses for tuition and school charges. The maximum that can be claimed per student is $1,650. The Hope Scholarship tax credit may only be used for college charges not covered by other forms of financial aid.
The Lifetime Learning tax credit is similar to the Hope Scholarship credit except that the student may be attending any grade level, including graduate school. This credit is for up to $2,000 of out-of-pocket expenses for tuition and school charges for all students in the family combined.
Eligibility for the Hope Scholarship and Lifetime Learning tax credits phases out starting with an adjusted gross income of $57,000 for a single tax filer. You may not claim both Hope Scholarship and Lifetime Learning tax credits for the same year in college.
Education Savings Accounts
For each child under age 18, families may deposit $2,000 per year into an Education Savings Account (ESA). Earnings would accumulate tax-free and no taxes will be due on distributions to pay qualifying expenses for tuition, fees, books, equipment, room and board. The ESA is phased out for families with incomes above $220,000 and for single filers above $110,000. A taxpayer who uses tax-free distributions from an Education IRA may not, in the same year, benefit from the HOPE Scholarship or Lifetime Learning Credit.
Allows an above-the-line deduction (the taxpayer does not need to itemize in order to benefit) for interest paid in the first 60 months of repayment on private or government-backed loans, post-secondary education and training expenses. The maximum deduction is $2,500 in 2007. It is phased out for joint filers with incomes over $140,000 and to single filers with incomes over $70,000 (indexed after 2002). The loan amount eligible for the deduction is limited to post-secondary expenses for tuition, fees, books, equipment, room, and board.
Taxpayers may withdraw funds from an IRA, without penalty, for the higher education expenses of the taxpayer, spouse, child or grandchild. The amount that can be withdrawn without penalty is limited to qualified higher education expenses for tuition, fees, books, equipment, room and board.
Additional Information
The Internal Revenue Service maintains a comprehensive list of Tax Benefits for Education, Publication 970. Visit this site for further information.