Important Education Tax Credits Available

Financial aid traditionally comes in the form of gift assistance, loan assistance, and employment assistance. These categories are referenced on the student financial aid award letter. The Taxpayer Relief Act of 1997 added a fourth category of financial assistance - education tax benefits. These programs are unlike other assistance in that they are received as tax credits when filing federal income tax returns.

As you review your financial aid award, it is important that you consider any tax credit as an addition to the scholarship or gift component of the financial aid package because it, like gift aid, reduces the cost of education.

Detailed information regarding these tax credits can be found in Publication 970 on the IRS website.

Hope Scholarship Credit

Lifetime Learning Credit

Tuition and Fees Deduction

Student Loan Interest Deduction

Coverdell Education Savings Accounts

Hope Scholarship Credit

The Hope Scholarship Credit is a tax credit available for the first two years of postsecondary education.

The student must be enrolled at least half-time in a degree or certificate program.
An individual paying qualified tuition and related expenses at an eligible post-secondary educational institution may claim the credit. Qualified expenses are defined as tuition and fees minus any gift assistance.
The amount of the credit is up to $1650 per eligible student
For single tax filers with modified adjusted gross incomes less than $57,000 ($114,000 for joint filers)
You may be able to claim a Hope Credit in the same year in which you receive a distribution from a Coverdell Education Savings Account. However, you cannot use the same expenses to figure the benefits for both programs.
Refer to Publication 970 on the IRS webpage for more detailed information.

Lifetime Learning Credit

The Lifetime Learning Credit applies to students beyond their second year of postsecondary education, including graduate and professional students as well as adults who return to school to update their skills or change careers.

The student must be enrolled at least half-time in a degree or certificate program, or may be enrolled less than half-time if the education is necessary to acquire or improve the student's job skills
An individual paying qualified tuition and related expenses at an eligible post-secondary educational institution may claim the credit.
The credit can be claimed up to $2000 for qualified educational expenses.
For single tax filers with modified adjusted gross incomes less than $57,000 ($114,000 for joint filers)
A student's expenses cannot be claimed for both the Hope Credit and the Lifetime Credit during the same year.
There is no limit to the number of years a student may claim the Lifetime Credit.
You may be able to claim a Lifetime Credit in the same year in which you receive a distribution from a Coverdell Education Savings Account. However, you cannot use the same expenses to figure the benefits for both programs.

Tuition and Fees Deduction

You may be able to deduct qualified tuition and related expenses paid during the year for yourself, your spouse, or a dependent, even if you do not itemize deductions on Form 1040 Schedule A.

The deduction is taken as an adjustment to income and can reduce the amount of your income subject to tax by up to $4,000.
You are not eligible for this deduction if your filing status is 'married filing separately' or if another person is entitled to claim an exemption for you as a dependent on his or her tax return.
This deduction is available to single filers with a modified adjusted gross income of $80,000 or less ($160,000 or less if filing a joint return.)
A taxpayer who claims the tuition and fees deduction may not, in the same year, benefit from an education tax credit on those same expenses.

Student Loan Interest Deduction

Parents and students who paid interest on qualified education loans and who meet the income qualification, may be able to take a deduction for interest paid on student loans.

A qualified education loan is a loan that must have been used to pay the cost of attendance at an eligible educational institution for a student enrolled at least half-time in a degree or certificate program. This includes loans used to pay for graduate school. The deduction does not depend on whether the loan is federally guaranteed or subsidized.
The interest can be deducted whether or not the taxpayer itemizes deductions.
Up to $2500 in interest can be deducted from the modified AGI, if the AGI is less than $70,000 or $140,000 if you are filing a joint retern.
A student may not claim the deduction in any tax year in which he or she is claimed as a dependent on another taxpayer's return.

Coverdell Education Savings Accounts (Formerly Education IRA's)

For each child under age 18, families may deposit up to $2000 per year into a Coverdell Education Savings Account (ESA). Earnings accumulate tax-free and no taxes will be due upon withdrawal if the funds are used for qualified educational expenses such as tuition, fees, books, supplies, room and board. Funds may be used for elementary, secondary or postsecondary educational expenses.

If your modified adjusted gross income is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary.

A taxpayer who uses tax-free distributions from a Coverdell ESA may not, in the same year, benefit from an education tax credit on those same expenses.