Tax Benefits for Education

Education Tax Credits One of the top benefits of getting the college education in the United States of America is the great tax benefits to parents and students. It is very important to understand these benefits before you start planning for college education for your child or yourself. Why does Federal Government offers education tax benefits? Federal Government offers these benefits also known as education tax credits for several reasons. But really the main reason is to make it easier for parents and students to fund their education and become more productive citizens. If an individual is college educated, it is very likely that they will be in a well paid professional job. This not only improves their personal living standard, but also increases county's GDP and they pay higher taxes as well. The Government can use the tax money to maintain infrastructure and operations of the country. On the other hand, if they are unable to get their education they might even end up going on social security thus not contributing to the society. What tax benefits are available for College Education? Below is a brief discussion of available education tax benefits: 529 Plans You can contribute to a state sponsored education savings plan and grow that investment tax free. If the withdrawals are made for qualified educational expenses you will do that tax free too. To learn more you can go to 529 Plans section of our website. Coverdell Education Savings Accounts This plan allows you to get deductions on any withdrawals you may make. While the contributors have to pay taxes when they contribute, the student can withdraw money tax free as long as it is a qualified college expense. You can learn more about this plan by going to Coverdell Education Savings Account article. Deduction for Student-loan Interest If your modified adjusted gross income is less than $65,000 ($135,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan. This deduction can reduce the amount of your income subject to tax by up to $2,500. You can go to the IRS website to learn more about this tax benefit. Employment and Business Related Education Deduction If you are taking employment or business related courses then your tuition may be qualified for a deduction. You can go to the IRS website to learn more about this tax benefit. Employer Sponsored Education Plan If your employer is paying your tuition for a job related or unrelated course, it is tax free for an amount up to $5,250 / year. You may have to pay taxes for any amounts above $5250. You can go to the IRS website to learn more about this tax benefit. Fellowship and Scholarship Tax Deduction A fellowship and scholarship is tax free if you are a candidate for a degree at an eligible educational institution, and you use the scholarship or fellowship to pay qualified education expenses. You can go to the IRS website to learn more about this tax benefit. Hope Credit You may be able to claim a Hope credit and reduce your tax bill by up to $1,650 for qualified education expenses paid for each eligible student. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax. You can go to the IRS website to learn more about this tax benefit. Individual Retirement Accounts Penalty Waiver If you make an early withdrawal in your IRA account you will owe only the taxes on the amount withdrawn. You will not have to pay an early withdrawal penalty. It is not considered to be a very good idea unless you really need money and you have no other options left to fund the education. You can go to the IRS website to learn more about this tax benefit. Lifetime Learning Credit By using this you can reduce your title by up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. You can go to the IRS website to learn more about this tax benefit. Tuition and Fees If you cannot qualify for Home or Lifetime learning credit because your income is too high then this deduction is for you. The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). You can go to the IRS website to learn more about this tax benefit. U.S. Savings Bonds If you have interest earned on your US Savings bonds they may qualify for a tax deduction. To learn more about this tax benefit you can go to our US Savings Bond article.