Student Tax Breaks
Types of Student Breaks • Tax Credits - American Opportunity Credit - Lifetime Learning Credit
• Deduction for student loan interest • Education Savings Accounts
What is a Tax Credit • A tax credit reduces the amount of taxes that you owe. – This differs from a tax deduction which only reduces the amount of your taxable income.
• The amount of tax credit received is equal to the amount reduced from your taxes. – “A dollar for dollar reduction”
American Oppurtunity Tax Credit • Expanded from and replaced the Hope Credit • The maximum annual credit $2500 per student. • If the student is a dependent then the parent will claim the credit. • Credit can be claimed for 4 college years. • Can be claimed for each student in a family.
Who Qualifies â€˘ Individuals whose MAGI is less then $80,000 ($160,000 if filing jointly) â€˘ Must be a part time student in an accredited college or university.
Calculating Credit • The AOC is calculated based on a 100% of the first $2000 spent on Tuition, fees, and course materials. • With an additional 25% of the next $2000 • Therefore maximum annual credit of $2500. • 40% refund if credit exceeds your tax liability.
Lifetime Learning Credit • Tax credit for tax payers who have taken on education expenses. • Can be claimed for the expenses taken on by the taxpayer, a spouse, or a dependent. • Calculated on a per family basis. Credit does not vary with more students in the family.
Calculating Credit • Credit is equal to 20% of the taxpayers out of pocket expenses for qualified tuition. • Maximum amount of expenses is $10,000 – Therefore maximum tax credit is $2000.
Qualifications • Must be a least a part-time student. • Must attend an accredited college or university that is eligible for the LTLC. • Designed to benefit taxpayer with low to moderate income. • Total gross income can’t exceed $57000. – Credit amount starts phase out at $47000.
Qualified Expenses • Tuition – Through student loans or borrowed funds.
• Must deduct grants, scholarships and reimbursements. • Does not include: – Equipment, room and board, insurance, student health fees, transportation, etc.
Forms • For both AOC and the LTLC the form that form that must be filled out is: – Form 8863
• This would be an attachment to the Form 1040.
Deduction for Student Loan Interest â€˘ On your federal tax income return, it is possible to deduct up to $2500 of the interest you paid on student loans. â€˘ This is not limited to government sponsored loans but loans made to student from family members are not eligible.
Qualifications • Income must be less then $75,000 ($150,000 if filing jointly) • Phase out begins at $60,000 ($120,000 if filing jointly) • Loan must be taken out for you, a spouse, or a dependent. • Student must be enrolled in at least a half time program.
Qualified Expenses â€˘ Total cost of schooling including: â€“ Tuition, room and board, books, supplies, equipment, and other necessary expenses, such as transportation.
Forms â€˘ The lending institution will send you a Form 1098-E (Student loan interest statement) â€˘ For exact calculations for student loan deductions use Form 1040.
Education Savings Accounts • Coverdell Savings Accounts – You are able to deposit $2000 per year to be used toward educational investment. – Interest earned is not taxed.
• There are some restrictions: – The funds must be used for the child before they are 30 for qualified educational expenses. – Before the child turns 18 the account must be started, and all contributions made.
Qualify to Contribute • Multiple people can deposit into one account (parents, grandparents, relatives, etc) • Contributors must have an MAGI under $110,000. ($220,000 if filing jointly) • Maximum contribution levels decrease towards upper limits. (ex. If MAGI is $100,000 the contribution allowed is $1333.)
Penalties • There will be penalties if money is withdrawn for non-educational purposes. – 10% penalty tax, plus income tax on interest earned.
• If money is withdrawn after the child turns 30 the account will be subject to taxes. – One way to avoid this would be transferring money to a designated beneficiary, such as a younger sibling.
Conclusion â€˘ Through specialty tax credits and tax deductions the government offers many solutions to help with college expenses.
Work Cited • •
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"Student Loan Interest." Getting Ready for College. N.p., n.d. Web. 3 Oct. 2010. <http://www.getreadyforcollege.org/gpg.cfm?pageid=115>. "Student Loan Interest Deduction." Money-Zine.com. N.p., 2009. Web. 3 Oct. 2010. Path: http://www.money-zine.com/Financial-Planning/CollegeLoan/Student-Loan-Interest-Deduction/. Gobel, Reyna. "Education Savings Account." Investopedia. N.p., n.d. Web. 3 Oct. 2010. <http://www.investopedia.com/university/retirementplans/esa/>. IRS.gov. N.p., 2009. Web. 3 Oct. 2010. <http://www.irs.gov/>. "Tax Breaks for Student." About.com. Ed. Jamie Littlefield. N.p., n.d. Web. 3 Oct. 2010. <http://distancelearn.about.com/od/payingforschool/a/taxbreak.htm>. Cussen, M. (2010, April 14). Tax Breaks for Students. Retrieved September 25, 2010, from http://www.forbes.com/2010/04/14/student-tax-breaks-personalfinance-taxes.html