Federal tax relief is available to help with the costs of college. Parents will automatically qualify for tax breaks if they have dependent students. Different tax breaks are available depending upon the amount spent.
Here are several different saving strategies available to parents:
Some of the tax breaks available for parents who help pay for college education expenses include tax credits and tax deductions.
Tax credits allow you to subtract, dollar-for-dollar, the credit amount from your final federal income bill. Tax deductions are subtracted from your income before taxes are calculated. Both are useful in reducing your overall tax, but tax credits tend to provide greater total savings than tax deductions. We have listed several tax deductions and several tax credits that parents can take advantage of.
Parents can deduct up to $4,000 for qualified education expenses. These expenses can include tuition and mandatory fees but may not include expenses paid for room, board, or books.
Several things to keep in mind when claiming this deduction include :
If you took out a private education loan or a federal PLUS loan to help pay for tuition, room and board, or books and supplies, you may be able to deduct up to $2,500 of the paid loan interest. While this deduction can be used for federal and privately issued loans, it does not apply to loans made to students by their parents.
Additional rules for this deduction include the following:
The Hope tax credit is designed to help defray costs of the first two years of higher education and can be used to claim up to $1,650 of a student's tuition and fees (no room or board). To claim the Hope tax credit for your child's expenses you must claim your child as a dependent. If you do not claim them as a dependent, then your children can claim the Hope tax credit for themselves on their tax return.
If you claim the Hope tax credit be aware of the following:
The Lifetime Learning tax credit is designed to help defray college costs after the first two years when the Hope tax credit can no longer be applied. The credit is also less restrictive than the Hope tax credit in that there are no requirements of course load. This credit can also be claimed for all post-secondary education, including just a single course to acquire or improve job skills.
Other things to keep in mind when claiming this credit include:
If you qualified for any of these tax credits or deductions, be sure to get the most up-to-date information from the IRS website. You may also want to consult with your private financial advisor or tax preparer.