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Basic Tax Breaks for Higher Education

It costs a small fortune to send a child to college these days. Parents may be able to benefit from certain tax breaks for higher education expenses. Here is a roundup of the basic tax benefits for your 2005 return.

Education tax credits: You may qualify for one of the following two special tax credits for children attending college.

1. Hope Scholarship Credit: This credit is equal to 100% of the first $1,000 of qualified expenses and 50% of the next $1,000 of qualified expenses for each of the first two years of higher education. The maximum credit for 2005 is $1,500 per student.

2. Lifetime Learning Credit: The Lifetime Learning Credit is equal to 20% of the first $10,000 of qualified expenses. The maximum credit per year is $2,000. Caution: Be aware that the Lifetime Learning Credit is not available on a per-student basis. Thus, the credit is limited to $2,000-no matter how many students are in the family.

Both credits are phased out at relatively low-income levels and completely disappear for joint filers with an adjusted gross income (AGI) of $107,000 ($53,000 for single filers).

Tuition deduction: You may be able to take advantage of an above-the-line deduction for college tuition expenses. The maximum deduction for 2005 is $4,000. A deduction of up to $2,000 is available to joint filers with an AGI that does not exceed $160,000 ($80,000 for single filers).

Coverdell Education Savings Accounts (ESAs): Distributions from a Coverdell ESA-formerly known as the Education IRA (individual retirement account)-are tax-free to the extent that they are used for qualified education expenses. The maximum annual contribution is $2,000. This tax break is phased out for joint filers with an AGI of $190,000 to $220,000 (double the range for single filers).

Student loan interest: The tax law provides an annual deduction of up to $2,500 for student loan interest. For 2005 returns, this deduction is phased out for joint filers with an AGI between $105,000 and $135,000 ($50,000 to $65,000 for single filers).

Section 529 plans: You can prepay higher education expenses through a Section 529 plan. There is no current tax on the earnings within the plan. Furthermore, distributions from Section 529 plans are generally exempt from income tax if the funds are used to pay for higher education expenses.

Educational assistance plans: The first $5,250 of benefits paid by an employer through an educational assistance plan is excluded from tax. This exclusion has been extended to graduate courses as well as undergraduate courses.

The rules seem pretty straightforward, but the coordination of these tax breaks is complex. Consult with a professional tax return preparer concerning your personal situation.

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	[ return to list ] Basic Tax Breaks for Higher Education It costs a small fortune to send a child to college these days. Parents may be able to benefit from certain tax breaks for higher education expenses. Here is a roundup of the basic tax benefits for your 2005 return. Education tax credits: You may qualify for one of the following two special tax credits for children attending college. 1. Hope Scholarship Credit: This credit is equal to 100% of the first $1,000 of qualified expenses and 50% of the next $1,000 of qualified expenses for each of the first two years of higher education. The maximum credit for 2005 is $1,500 per student. 2. Lifetime Learning Credit: The Lifetime Learning Credit is equal to 20% of the first $10,000 of qualified expenses. The maximum credit per year is $2,000. Caution: Be aware that the Lifetime Learning Credit is not available on a per-student basis. Thus, the credit is limited to $2,000-no matter how many students are in the family. Both credits are phased out at relatively low-income levels and completely disappear for joint filers with an adjusted gross income (AGI) of $107,000 ($53,000 for single filers). Tuition deduction: You may be able to take advantage of an above-the-line deduction for college tuition expenses. The maximum deduction for 2005 is $4,000. A deduction of up to $2,000 is available to joint filers with an AGI that does not exceed $160,000 ($80,000 for single filers). Coverdell Education Savings Accounts (ESAs): Distributions from a Coverdell ESA-formerly known as the Education IRA (individual retirement account)-are tax-free to the extent that they are used for qualified education expenses. The maximum annual contribution is $2,000. This tax break is phased out for joint filers with an AGI of $190,000 to $220,000 (double the range for single filers). Student loan interest: The tax law provides an annual deduction of up to $2,500 for student loan interest. For 2005 returns, this deduction is phased out for joint filers with an AGI between $105,000 and $135,000 ($50,000 to $65,000 for single filers). Section 529 plans: You can prepay higher education expenses through a Section 529 plan. There is no current tax on the earnings within the plan. Furthermore, distributions from Section 529 plans are generally exempt from income tax if the funds are used to pay for higher education expenses. Educational assistance plans: The first $5,250 of benefits paid by an employer through an educational assistance plan is excluded from tax. This exclusion has been extended to graduate courses as well as undergraduate courses. The rules seem pretty straightforward, but the coordination of these tax breaks is complex. Consult with a professional tax return preparer concerning your personal situation. [ return to list ]
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