College

Whether you had a child going to college last year or you returned to school, the cost of college is an event that can have a high financial impact. The following higher education benefits are briefly explained:

Tax benefits
Student Loan Interest

Tax Benefits

A number of tax benefits are available to families who are saving for or paying higher education costs or who are repaying student loans. The following higher education benefits are briefly explained:

American Opportunity Credit
Lifetime Learning Credit
Education IRA
Education Savings Bond Program
Student Loan Interest

Note: You cannot claim more than one type of tax benefit for the same expense.

Education Credits

Beginning in 2009, the following changes apply to the Hope and lifetime learning (education) credits.

Income limits for credit reduction increased. For 2009, The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

Education Savings Plan

You may be able to contribute up to $2,000 each year to an Coverdell Education Savings Account IRA to finance a child's qualified higher education expenses. Contributions to an education IRA are not deductible and can be made only until the child reaches age 18, but amounts deposited in the account grow tax free until withdrawn. Withdrawals from an education IRA to pay the child's qualified higher education expenses are also tax free.

Education Savings Bond

The education tax benefits explained earlier may affect the tax treatment of your U.S. savings bond interest.

When figuring the amount of U.S. savings bond interest you can exclude from your income under the Education Saving Bond Program, count any contribution to a qualified state tuition program or to an education IRA as a qualified higher education expense.

Do not count any expense you use to claim the Hope Credit or Lifetime Learning Credit. Also, do not count any expense you use to figure how much distribution from an education IRA you can exclude from your income. For additional information, see Education Savings Bond Program in Publication 550.

Student Loan Interest

If you paid interest on qualified student loan interest, you may be able to claim a deduction of up to $2,500.

The deduction is an adjustment to income, so you can claim it even if you do not itemize your deductions.

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