Tax Benefits

The good news about paying for a college education is that the federal government has made provisions to offer money-saving benefits to taxpayers and their families who are funding a college education. There are two types of benefits you should be aware of tax deductions and tax credits.

What's the difference? With a tax deduction, the amount of your income that is subject to being taxed is actually reduced before the tax is calculated. With a tax credit, the amount of income tax is reduced after the tax has been calculated.

Tax Deductions		Student Loan Interest Deduction If you are a borrower paying interest on student loans, you may be eligible to deduct up to $2,500 of the interest you paid! You are eligible if the loan was used to pay for tuition and/or other higher education expenses, which may include fees, room and board, books, supplies, equipment, and other education expenses. Contact the IRS or your tax advisor for more information. Tuition and Fees Deduction This is another tax deduction available to you through tax year 2005. With the tuition and fees deduction, individuals may be able to deduct higher education expenses for themselves, a spouse or even a dependent. To claim the deduction, it is not necessary to itemize your deductions on your tax return.

Tax Credits		The Hope Tax Credit With the Hope tax credit, families may receive up to $1,500 per student during his/her first two years of college (based on tuition and fees paid for education expenses). The Hope tax credit is available for students who are enrolled at least half-time in a degree or certificate program, have not completed the first two years of a post-secondary education and who do not have any felony drug convictions. Only tuition and fees can be counted toward this credit — other education expenses do not qualify. Students must be listed as dependents on the tax return to be eligible to claim the Hope tax credit. Tip! This tax credit applies to each student, so families with two dependent students enrolled may claim a credit for each dependent student if they are in their first or second year of college! 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. A student must be listed as a dependent on your return in order to claim the credit. Keep in mind that this credit is also figured on the basis of one credit per tax return, regardless of how many dependent students are involved. STOP! You may choose only one of the credits listed above (Hope or Lifetime Learning) for each dependent student in the applicable tax year. For example, if you use the Hope credit for the first two years of college, you could then use the Lifetime Learning credit in following years.
Additional Tax Benefits

Families should be aware that there are also other ways to receive tax credits or tax deductions on the cost of higher education. These include plans such as education IRA withdrawals and education assistance provided by an employer. Check with your employer for further details. STOP! Taxpayers cannot claim the Hope or Lifetime Learning credit when taking a tax-free distribution from an Education IRA, so weigh your choices carefully. For more information, contact your tax advisor. You may also contact the IRS directly by phone at (800) 829-3676 or online at www.irs.gov. A helpful publication outlining all of the education tax benefits available is provided by the IRS Publication 970, "Tax Benefits for Education" which may be viewed at www.irs.gov/pub/irs-pdf/p970.pdf.