Tax Benefits

The IRS offers various tax savings to individuals and families paying for higher education. Tax deductions reduce the amount of income subject to tax before the tax is calculated. Tax credits reduce the amount of income tax after the tax is calculated.

Student Loan Interest Deduction
Up to $2,500 in interest paid on eligible student loans may be deducted from your taxable income. To be eligible, the loan must have been used to pay for a student's tuition and other higher education expenses.

Expenses can include tuition, fees, room, board, books, supplies, and equipment. The deduction is phased out for individuals with incomes greater than $55,000.

The Hope Scholarship Tax Credit
You may be eligible to receive up to a $1,500 tax credit per student during a student's first two years of college. Eligible students must be enrolled at least half time in a degree or certificate program, and have not completed the first 2 years of post-secondary education. Qualified expenses include tuition and fees for dependent students.

Lifetime Learning Tax Credit
You may also claim a Lifetime Learning credit of up to $2,000 after the first two years of post-secondary education if you pay for the education-related costs. Eligible students must be enrolled in at least one Post-secondary course, but do not need to be pursuing a degree. This tax credit is equal to 20% of the first $10,000 of qualified expenses paid. Tuition and related fees are included, but room, board, books, supplies and other living expenses are excluded.

Education IRAs
Education IRAs (Individual Retirement Account) are trusts or accounts to help families save money to pay for a student's expenses. With this account, deposits are tax-free until you withdraw funds. In general, you may withdraw from an education IRA on a tax-free basis if the amount(s) does not exceed the expenses for the student. Expenses might include tuition, fees, books, supplies, and other equipment. If the student is enrolled at least a halftime, room and board costs may also be considered in these expenses.

Restrictions apply. And you may not claim the Hope and Lifelong Learning credit in the same year. Nor may you claim either deduction in a year you make a withdrawal from an Educational IRA.