Claim tax credits and deductions for education

Tax credits

You can elect one of the credits below per student per tax year.

American Opportunity Credit (available beginning in the 2009 tax year)

Effective beginning with the 2009 tax year
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.

Hope Scholarship Tax Credit

For the 2009 tax year, families may receive a tax credit for expenses paid for the student’s first two years of college (based on tuition and fees paid for education expenses):

Up to $1,800 per student for most families
Up to $3,600 for students in a midwestern disaster area

Available for students who are enrolled at least half time in a degree or certificate program, have not completed the first two years of a postsecondary education and who do not have any felony drug convictions.
Only tuition and certain education expenses that must be paid to the institution as a condition of enrollment or attendance can be counted toward this credit.
Students must be listed as dependents on the tax return to be eligible to claim the Hope tax credit.

Lifetime Learning Tax Credits

For tax year 2009, you may claim a tax credit for education expenses incurred during all years of postsecondary education:

Up to $2,000 for most families
Up to $4,000 for students in a midwestern disaster area

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.

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 Hope or Lifetime Learning credit when taking a tax-free distribution from an Education IRA, so weigh your choices carefully. For more information, contact a tax advisor or visit the Internal Revenue Service (IRS) website. Also available online is IRS Publication 970, which outlines all of the current education tax benefits.

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.