Choosing among tax breaks for college costs

There is a vast array of tax breaks available for college students and their parents. How do you choose which one or ones to use and whose tax return to use it on? Here are some tips to help you figure this out.

  • Lifetime Learning Credit: The Lifetime Learning Credit is available to any student enrolled in college-level courses, including graduate school as well as individual classes taken to improve skills. The credit applies to tuition and fees. Books and supplies qualify only if the cost of these items is paid directly to the college as a condition of enrollment.

    The Lifetime Learning Credit is 20 percent of up to $10,000 you pay for tuition and fees in any year, or a maximum of $2,000. The credit may be taken each year, and there is no limit to the number of students in the family who are claiming this credit.

    The credit may be reduced if your income is too high. For single taxpayers, the credit begins to phase out when adjusted gross income reaches $45,000 and phases out completely when adjusted gross income reaches $55,000. For married taxpayers filing jointly, the credit begins to phase out when adjusted gross income reaches $90,000, and phases out completely when adjusted gross income reaches $110,000.

    If the student is claimed as a dependent, the person claiming the student is entitled to the Lifetime Learning Credit.

  • Deduct student loan interest: If you borrow money to pay for college costs, you may be entitled to take a deduction for the interest expense on the borrowed funds. The deduction is taken as an adjustment to income on page one of your tax return, which means that you don’t need to itemize deductions to qualify for this deduction.

    Deductible student loan interest is interest paid during the first 60 months in which the loan payments are required. The maximum deductible amount is $2,500 per year. The loan can be for tuition, books, fees, and room and board.

    As with almost all nice things in the tax code, there is an income restriction on the deduction of student loan interest. The student loan interest deduction begins to phase out at adjusted gross income of $50,000 for single filers with complete phase-out at $65,000. For married joint filers the phase-out begins when adjusted gross income reaches $105,000 and phases out completely at $135,000.

    If the student is claimed as a dependent, the person claiming the student takes the student loan interest deduction, even if the loan is in the student's name.

  • Hope Credit: The Hope Credit is available to any student enrolled in a degree or certificate program at a college or university. The student must be attending at least half-time during at least one semester of the tax year. The credit applies only to college costs incurred during the first and second years that the student is enrolled after high school. The credit applies to tuition and fees. Books and supplies qualify only if the cost of these items is paid directly to the college as a condition of enrollment.

    The Hope Credit is 100 percent of the first $1,100 paid for tuition and fees during the tax year and 50 percent of the second $1,100 paid, for a maximum of $1,650 per year. The Hope Credit begins to phase out at adjusted gross income of $45,000 for single filers with a complete phase-out at $55,000. For married joint filers, the credit begins phasing out when adjusted gross income reaches $90,000 and is completely phased out at $110,000.

  • Miscellaneous itemized deduction: This one is for taxpayers who are already working. The IRS allows a miscellaneous itemized deduction for certain education costs. If you have already met the minimum requirements for your job, and the additional education you take does not qualify you for a new trade or business, you are entitled to take the deduction. For example, MBA program expenses can qualify as deductible expenses if you are currently employed in the finance arena and these courses will not qualify you for a new job, but will improve your skills in your current job.

    If you meet these requirements and are eligible to take a deduction for your expenses, you must itemize your deductions on Schedule A. The education deduction falls under the 2% rule for miscellaneous deductions, meaning that only the portion of your miscellaneous deductions that exceeds 2% of your adjusted gross income will be counted as a deduction. You will report the total amount of expenses on Schedule A. There is a place on that schedule where the 2% computation can be performed.

    The types of expenses that qualify for the education itemized deduction include:

  • tuition

  • books

  • supplies

  • lab fees

  • transportation

  • research

  • typing

  • computer and software

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