College Tax Breaks

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The price of sending a student to college is continually rising, fortunately for parents, federal tax relief is available to help with these ever-increasing costs of college.

These tax benefits are available to parents of dependent students and are based on the amount spent on education-related expenses:

Tax Credits vs. 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.

Tax Deduction for College Tuition and Fees

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 :

You must file form 1040. The deduction is entered on line 34.
You can choose to take a tax credit instead of the tax deduction, and enter it on line 49 of form 1040.
The $4,000 value is the maximum allowed per year, regardless of how many students are in your family.
You can not claim this deduction if you are married and filing separately
You can not claim this deduction if you used earnings from a 529 plan or withdrawals from a Coverdell Education Account to pay the expenses
You can not claim the deduction if you are claiming the Hope tax credit of the Lifetime learning tax credit.
The deduction is limited by your income and phases out the more you make. If you're single and your income is between $65,000 and $80,000 your maximum deduction is $2,000. The same applies to married couples with income between $130,000 and $160,000. You do not qualify for this deduction if your income is over these limits.

Tax Deduction for Student Loan Interest

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:

Report interest paid on line 33 of form 1040 or line 18 of form 1040A.
You will need form 1098-E from your lender, which shows the interest paid on your loan.
The deduction is limited by your income and phases out if you're single with income between $55,000 and $70,000 or if you're married and filling jointly with income between $110,000 and $140,000. You do not qualify for this deduction if your income is over these limits

Hope Tax Credit

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:

You must file form 1040 or 1040A and attach IRS form 8863 (Education Credits)
There is no limit on the number of family members receiving the credit.
You can not claim the credit if you are married and filing separately.
The qualifying student must have been enrolled in at least half the normal full-time course load.
The credit can be claimed for only two years for each student.
The amount of tax credit is limited by your income. The credit is phased out if you're single with income between $47,000 and $57,000 or married filing jointly with income $94,000 and $114,000.

Lifetime Learning Tax Credit

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:

You must file form 1040 or 1040A and attach IRS form 8863.
The maximum allowable credit is $2,000 per tax return, not per student.
You may not claim both the Hope and Lifetime Learning Credit for the same student during the same year.
The income limits from this credit are phased out for incomes between $47,000 and $57,000 if single or $94,000 and $114,000 if married and filing jointly

Information on Tax credits and Deductions

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.