The tax benefits can be used to get back some of the money you spend on tuition or loan interest or to maximize your college savings.
Read IRS Publication 970, Tax Benefits for Education to see which federal income tax benefits might apply to your situation. Here are some highlights:
Tax Credits for Higher Education Expenses
Two tax credits help offset the costs (tuition, fees, books, supplies, equipment) of college or career school by reducing the amount of your income tax:
- The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as the student works toward a degree or similar credential.
- The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required for the course and had to be purchased from the school.
Even if you normally wouldn't file a tax return because of your income level, be sure to do so! If you don't, you'll miss out on tax credits that would put money in your pocket.
Coverdell Education Savings Account
A Coverdell Education Savings Account allows up to $2,000 a year to be put aside for a student's education expenses (elementary, secondary, or college).
Qualified Tuition Programs (QTPs; also known as 529 Plans)A QTP/529 plan is established by a state or school so that you can either prepay or save up to pay education-related expenses. Once you're in college or career school and you withdraw money from your account to pay your education expenses, the money you withdraw will not be taxed. Learn more about state 529 plans. To find out whether the college you plan to attend participates in a QTP, ask the financial aid or admissions staff.
Student Loan Interest Deduction
You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent. This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year.
Using IRA Withdrawals for College Costs
You may withdraw from an IRA to pay higher education expenses for yourself, your spouse, your child, or your grandchild.
You will owe federal income tax on the amount withdrawn, but won't be subject to the early withdrawal penalty.