Claim tax credits and deductions for education

Mapping Your Future offers the following tax information as a resource and a convenience to you. We review our site content regularly to ensure content is correct and up-to-date; however, you should not consider us to be qualified tax advisors. If you are uncertain about your rights and responsibilities, contact a qualified tax advisor or visit the Internal Revenue Service (IRS) website. IRS Publication 970 outlines the education tax benefits.

Tax credits

You can elect one of the credits below per student per tax year. (There are income limitations so you may not qualify).

American Opportunity Credit

For expenses incurred during the first four years of postsecondary education
Up to $2,500 for qualified education expenses paid for each eligible student
Student must be pursuing an undergraduate degree or other recognized education credential
Student must be enrolled at least half-time for at least one academic period during the tax year
Tuition and fees required for enrollment are included, as well as course-related books, supplies, and equipment, even if you did not purchase them from the school.
The eligible student may be the taxpayer, his or her spouse, or a dependent claimed as an exemption on the tax return.

Lifetime Learning Tax Credit

For tax year 2010, you may claim a tax credit (up to $2,000 for most families) for education expenses incurred during all years of postsecondary education.
Eligible students must be enrolled in at least one postsecondary course (undergraduate or graduate), or courses to acquire or improve job skills
Tuition and related fees are included, but excluded are room, board, books, supplies and other living expenses, unless you were required to pay the fees to the school as a condition of enrollment or attendance.
The student must not be listed as a dependent on another person’s the tax return.
This credit is figured on the basis of one credit per tax return, regardless of how many dependent students are involved.
To assist with determining your credit, you should receive a 1098-T from the postsecondary school.

The Hope Scholarship Tax Credit is not available for 2010.

Tax deductions

College Tuition and Fees Deduction

You can reduce your taxable income by up to $4,000 for undergraduate and graduate expenses, depending on your modified adjusted gross income.
Contact the IRS or a tax advisor for more information.

Student Loan Interest Deduction

Allows eligible student loan borrowers to deduct up to $2,500 of interest paid.
Loan must have been used to pay for tuition and/or other higher education expenses, which may include fees, room & board, books, supplies, or equipment.
Student must have been enrolled at least half-time in a program that led to a degree, certificate or other recognized educational credential.
Contact the IRS or a tax advisor for more information.

Other tax-related information

Other ways of receiving tax credits or tax deductions on the cost of higher education include Education IRA withdrawals and educational assistance provided by an employer (tuition reimbursement programs). Check with your employer or a tax advisor for further details.

Taxpayers cannot claim the Lifetime Learning Credit when taking a tax-free distribution from an Education IRA, so weigh your choices carefully.

Redeeming qualified U.S. Saving Bonds

An individual who redeems qualified U.S. Saving Bonds to pay for higher education expenses may be able to exclude interest income from gross income.
For 2010, the amount of your interest exclusion might be gradually reduced depending on your filing status and modified adjusted gross income (AGI).

Borrowing from home equity

Proceeds of a home equity line of credit do not count as income.
Interest on a home equity line of credit is often fully tax-deductible.
The interest rate on a home equity line of credit could be lower or higher than the rates on federal education loans.

Borrowing from 401(k)

Less-favorable option than educational loans, which offer low interest rates and tax-deductibility.
May be valuable last option for those who have regularly saved in their 401(k)s and have children in or near college age.
If funds are borrowed from a 401(k) and then you leave your current employment, the entire loan must be repaid immediately.