Show Me the Money! Part 4: Tax Breaks & Benefits

 

By DANIEL SILVER, Eastern Staff Writer

 

 

The income tax deadline of April 15 looms only one month away, and the good news is that the IRS offers some breaks to families now paying for students in college, or planning to do so in the future. These benefits come in the form of tax credits (that directly reduce income tax owed) as well as deductions (that reduce the amount of taxable income) even for those who do not itemize deductions.

For married taxpayers filing jointly with income under $103,000 ($51,000 for singles) both the Hope credit and the Lifelong Learning credit may provide significant advantages. To claim these credits, the taxpayer must pay qualified education expenses for the higher education of an eligible student (defined as oneself, one’s spouse or a dependent claimed as an exemption on the tax return). Married taxpayers filing separately may not take these credits, nor may anyone listed as a dependent on someone else’s return. (However, parents who pay expenses and list a student as a dependent on the return do qualify for the benefit.)

According to IRS Publication 970: “Tax Benefits for Education”, all tuition, costs and fees required for enrollment or attendance and paid directly to the learning institution count as educational expenses towards these credits. On the other hand, charges for room and board, insurance, medical care, transportation or other similar personal expenses do not qualify.

For the Hope credit, the student must take at least one-half the normal full work load for that course of study for at least one academic period during the tax year at an eligible educational institution (virtually all accredited public, non-profit and private for-profit post-secondary learning institutions). For the Lifelong Learning credit, the student must enroll in at least one course during the tax year.

The law permits students to qualify for the Hope credit only during their first two years of post-secondary study, and allows a credit up to $1,500 per year for each student for whom the tax filer pays education expenses. (If a family pays the college expenses of two students, for example, they could claim two Hope credits–up to $3,000 subtracted directly from income tax owed—during each year of eligibility.) The IRS puts no limit on the number of eligible years for the Lifelong Learning credit, and taxpayers may claim that credit up to $2,000 total per year.

In general, the IRS points out, the Hope credit offers greater benefits to families who pay less than $7,500 in college costs; for students whose qualified expenses total more than $7,500, the Lifelong Learning credit provides better tax savings. No one may claim both credits for the same student’s expenses in the same year, although if a family pays for more than one eligible student during that year, they may choose—depending on individual circumstances—to claim a Hope credit for one and a Lifelong Learning credit for another.

Additional education-related benefits may further cut tax obligations. For example, even if they do not itemize deductions, taxpayers can reduce their before-tax income by deducting interest on loans taken solely to pay for education expenses. This provision allows taxpayers—depending on what they earn—to lower their taxable income by as much as $2,500. Borrowers who pay for their own educational expenses (that for this benefit includes tuition and fees as well as room and board, books and supplies, transportation and other necessary costs), for their spouse’s or for a dependent’s, qualify for this deduction.

Married taxpayers who earn less than $130,000 and file jointly (less than $65,000 if single) can make use of another benefit, again even if they do not itemize, that will reduce their before-tax income. Only those who do not claim either a Hope or a Lifelong Learning credit for the tax year can take this “tuition and fees deduction”—up to $3,000.

As with the other provisions, the person claiming the benefit must pay educational expenses either for oneself, one’s spouse, or one’s dependent. (Also, the law states that to qualify for the tuition and fees benefit, the student must have either a high school diploma or a GED credential and must enroll in at least one course at an eligible institution.) As with the Hope and Lifelong credits, only funds paid for tuition, costs and fees both required for enrollment or attendance and paid directly to the learning institution count towards this deduction.

For IRA account holders, another provision allows them to take distributions from their accounts for educational expenses without having to pay the ten-percent penalty that normally applies for early withdrawal.

Those interested will find more detailed information for these and other tax benefits in the IRS Publication 970: “Tax Benefits for Education” available at your local IRS office, or online at http://www.irs.gov/, by phone request at 1-800-829-3676, by fax at 703-368-9694 or at the office of your local tax advisor. IRS also answers tax questions by telephone at 1-800-829-1040.

 

Additional Resources: 

 

All "College Tips" columns are available at http://www.newstribune.info.

WV Apply, Admission and Financial Aid Information at http://www.wvapply.com/

 

Mineral County Technical Center at http://mctc.mine.tec.wv.us/college.htm

 

Eastern Community and Technical College at http://www.eastern.wvnet.edu/ (304-434-8000; or tollfree: 1-877-982-2322)


Potomac State College of West Virginia University at http://www.potomacstatecollege.edu/ or  (304-788-6820 or tollfree: 1-800-262-7332)

 

Community and Technical College System of West Virginia at http://www.wvtechprpe.wvnet.edu (304-558-2411)