More Americans are headed back to school, Federal tax deductions help with the expense

So far we’ve discussed the American Opportunity Tax Credit (modified Hope Credit), the Lifetime Learning Credit and even Tuition & Fee Deductions. Today though, we’re going to cover the last in our 4 part series on education tax incentives—Student Loan Interest Deduction. The great thing about this deduction is that you can take this deduction even if you qualify for the other tax credits or deductions!

The Goods – Part 4

Usually personal interest paid on loans (other than certain mortgage interest) is not deductible. However, there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This gives taxpayers with an adjusted gross income (MAGI) that is less than $70,000 ($145,000 if filing a joint return) the option to deduct interest on student loans from gross income, up to $2,500.

Highlights:

• Student must attend school at least 1/2 time
• The loan must be used to pay qualified education expenses for you, your spouse, or a person who was your dependent when you took the loan
• Interest must have been paid or incurred within a reasonable period of time before or after you took the loan
• You can claim this deduction even if you do not itemize deductions on Form 1040′s Schedule A
• Interest deduction can be applied to loans for graduate school

Qualified Education Expenses:

• Tuition & fees
• Room & board  (no greater than the cost included of attendance for a particular academic period & living arrangement of the student (determined by education institution), or the actual amount charged for resident housing operated by the educational institution)
• Books, supplies & equipment
• Other necessary expenses (such as transportation)

One caveat, the taxpayer cannot deduct student loan interest of a dependent unless the loan is in the taxpayer’s name. Also, loans from a related person or through a qualified employer plan are not qualified student loans for this deduction.

Side Note: Loan interest is completely separate. In fact, you can report both interest and tuition while attending the same school. This happens with many grad students who are paying interest on a school loan but still attending classes at the same college.

If this series has helped you make the decision to go back to school, we’d love to hear about it!

Post-secondary education costs are on the rise but Federal tax incentives attempt to provide some respite

While we’ve been talking about the Lifetime Learning Credit and the American Opportunity Credit (Hope Credit, modified for 2009-10), I would be remiss to leave out other options for taxpayers who may not qualify for either credit. If you don’t qualify for anything else, you may not be left completely on your own; you may still be able to claim a small deduction for some education expenses.

The Goods – Part 3

This is the least desirable education tax benefit since it is a deduction rather than a credit. This means the taxpayer does not get back educational expenses dollar for dollar, but instead only gets back educational expenses at their marginal tax rate level (e.g. a taxpayer with $1,000 in tuition and in the 15% tax bracket would only get back $150 as a tax deduction).  The tuition and fees deduction can reduce the amount of income subject to tax buy up to $4,000, however, and is taken as an adjustment to income.

Highlights:

• You can claim this deduction even if you do not itemize (Schedule A, Form 1040)

Qualifications:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return
• Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance

Those Who Do Not Qualify:

• Your filing status is married filing separately
• Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption
• Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return)
• You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens
• You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid

So, although it is not nearly as beneficial as the other tax credits we discussed, it may be helpful to those who cannot take advantage of those other credits.

Next week we will cover Student Loan Interest Deductions, a great little deduction that applies to a wide variety of tax payers.

Federal Tax Credits Help Working Adults Return to the Classroom

Last week we discussed the benefits of the American Opportunity Tax Credit (or modified Hope Credit, this week we are going to take a look at the Lifetime Learning Credit.

This federal tax credit will probably apply to a larger number of individuals as it is much more flexible. You aren’t required to be a part time student nor in your first four years of college or in a degree program, but you DO need taxable income for this credit to matter.

“Change does not necessarily assure progress, but progress implacably requires change. Education is essential to change, for education creates both new wants and the ability to satisfy them.” –Henry Steele Commager

The Goods – Part 2

The Lifetime Learning Credit of up to $2,000 per tax return is available for qualified education expenses paid for all enrolled students. Up to $4,000, if you happen to live in a Midwestern disaster area.

Highlights:

• Covers 20% of the first $10,000 in qualified education expenses (max. $2,000) or 40% for Midwest Disaster Area each year
• Degree status is not important
• There is no limit on the number of years the lifetime learning credit can be claimed for each student
• Only tuition and fees qualify
• Taxpayer may use payments made by dependents for the credit
• The amount of your lifetime learning credit for 2009 is gradually reduced (phased out) if or your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return)
• This credit is applied per tax return NOT per student

Qualifications:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return

On a side note: If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.  However, if you have more than one student you can opt to take credits based on a per-student, per-year basis.

You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return.)

So what if you don’t qualify for either of these two tax credits? Well, then  you will want to check out next week’s post covering the Tuition and Fees Deduction allowance.