There are many tax benefits available for reducing college costs. The first and foremost is the Qualified Tuition Program or 529 account. A 529 account allows earnings to grow tax deferred and distributions are tax exempt, on the Federal level, for qualified tuition expenses. Some states also make the distributions State tax free.
The next best tax break for education comes from U.S. Savings Bonds. EE and I bonds purchased after 1989 by a buyer over 24 years of age may be redeemed tax free for the buyer, buyers spouse or dependents when used for education and tuition expenses. Income limits for this tax break are raised each year.
Coverdell Education Savings Accounts or ESA’s allow earnings to grow tax deferred and withdrawals are tax free when used for qualified post-secondary education expenses. Until 2011, ESA’s may also be used for primary and secondary school expenses.
The Hope Scholarship Credit allows a parent to claim up to $1800 for each eligible dependent’s college tuition and fees. This allows a maximum credit of $1800 per child. The credit is reduced by percentage at higher income levels. A student themselves can take the credit if they are not a dependent on anyone else’s tax return. The student must be enrolled at least half time and must be enrolled in the first two years of a degree program. This deduction is good for up to two years per student. For the 2009 tax year there may be an increase in the Hope credit.
The Lifetime Learning Credit allows a taxpayer to claim a credit for up to $2,000 in tuition and expenses. This credit is also reduced by percentage at higher income levels. The taxpayer may not claim both the Hope credit and Lifetime credit in the same tax year for the same student. However, the Lifetime credit does not require a minimum enrollment or have a maximum number of years available. Both the Hope and Lifetime credits are applied against taxes owed and are nonrefundable credits.
A Tuition and Fees credit is available even if the tax payer chooses to not itemize deductions. This allows up to $4000 of deductions for education expenses for the taxpayer, spouse or dependent. Like many of the above programs there is an income cap limit. This deduction is applied to your total income and can reduce your adjusted gross income. Tax payers may also take a deduction for up to $2500 in student loan interest payments. This is also an above-the-line deduction, you do not need to itemize your deductions to claim this. This is also an A.G.I. deduction and has percentage calculations based on income.Finally it is important to note that there are tax-free scholarships and educational assistance plans available. Under section 127 of the educational assistance plan an employer may pay up to $5200 tax free for an employees education.
The more research you do, the more help you can find for furthering your, your children’s or grandchildren’s higher education!