NDSU Extension Family Economics

North Dakotans Saving for Education

Who's Paying?
     Tax Breaks for Education

It is important to consider education tax breaks when deciding who is paying for future education.  Who will be able to access those tax breaks may influence who will pay when it comes to education expenses. Generally, the tax breaks will follow the dependent.  If the parents claim the student as a dependent, they can use the tax breaks.

As higher education expenses continue to rise, the federal government is increasing tax deductions, tax credits and tax incentives as a way to assist American families in paying for post secondary education.  Some of the tax benefits will help while the family is saving for future education and some tax breaks will be available when the family and student are actually paying for higher education.

There are ten different tax breaks currently available for education savings and expenses.

These tax breaks are either tax credits or tax deductions, here is an explanation of the difference. A tax credit is a dollar amount deducted directly from the tax you owe. A tax deduction is an amount deducted from your income before figuring your tax liability.

 
Most of these tax breaks phase out as the taxpayer's income increases.

• Higher Education Expense Deduction - A maximum of $4,000 in tuition expenses in 2005 can be deducted from income even if the taxpayer does not itemize deductions.   A taxpayer may not use this deduction when using the Hope Scholarship or Lifetime Learning tax credits (these credits are discussed below). The amount that maybe deducted begins to phase out as income increases above $65,000 ($130,000 for joint filers).
• Coverdell Education Savings Accounts (Education IRA) - An annual contribution of $2,000 per child can be saved in an Education IRA. The contributions are not tax deductible but the savings grows tax deferred and distributions used for qualified education expenses are tax-free. The amount that may be contributed begins to phase out as income increases above $95,000 ($190,000 for joint filers).
• Hope Scholarship Credit - This is a tax credit for up to $1,500 per student and includes the first $1,000 of tuition and fees plus 50% of the next $1,000.  The tax credit is available for the first 2 years of post secondary education. The amount of the credit allowed is phased out as the taxpayer's income increases above $42,000 ($85,000 for joint filers).

• Lifetime Learning Credit - This is also a tax credit and can be
  as much as $2,000 per taxpayer return.  It is calculated as 20% of up to $10,000 of tuition and fees paid by the taxpayer.  This tax credit is available for a wider range of students and educational programs than the Hope Scholarship. The Lifetime Learning Credit can be used for an unlimited number of years. The amount of the credit allowed is phased out as the taxpayer's income increases above $42,000 ($85,000 for joint filers).

• Student Loan Interest Deduction - When paying back loans used for qualified higher education expenses the interest paid may be deducted from a taxpayer's gross income even if not itemizing deductions. The amount of the deduction allowed is phased out as the taxpayer's income increases above $50,000 ($100,000 for joint filers).

• Qualified Tuition Programs (529 Plans) - There are two types of Qualified Tuition Programs. There are no income restrictions for using these programs

            Prepaid Tuition Plan - Families can lock in future tuition
            expenses at today's rates by purchasing tuition credits or
            certificates on behalf of the future student. Returns on these
            accounts are tax-free when used for tuition.

            Savings Plan - Families can contribute an unlimited amount to a
            529 plan. The contributions are not tax-deductible but the earnings
            are tax-deferred and distributions will be tax-free when used for
            Qualified Education Expenses.     

• US Savings Bond Interest Deduction - The interest from US Savings Bonds may be tax free if used to pay for qualified education expenses of family members.  If you are married, you must file a joint return to qualify for the exclusion.   Both the principal and interest from the bonds must be used to pay qualified expenses in order to exclude the interest from gross income for tax purposes. The exclusion phases out as income levels increase above $59,850 ($89,750 for joint filers).

• Employee Assistance Plans - Employers can provide employees with up to $5,250 in financial assistance for education without having to report it as income to the employee for tax purpose.

For more detailed information on education tax breaks you may want to check out the online program from the University of Illinois Extension,
Tax Breaks for Higher Education. 

We see the term 'Qualified Education Expenses' often when learning about saving for education. So what are qualified education expenses?  Tuition and fees are always considered qualified education expenses but some tax breaks may also be allowed for money paid for books and supplies.  Room and board may also be included as a qualifying expense for some tax breaks if the student is enrolled at least half time in school.  The school or institution the student is enrolled in may need to be an "eligible institution" to qualify for tax breaks.  Generally a school is eligible if they take part in the federal student loan program.


 

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The Value of Education
What Will It Cost?
Who's Paying?
How To Make It Happen
It's Never Too Late
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