Take Advantage of College Tax Breaks

Some parents spend years saving for their children’s college education, while others scramble to search out scholarships and loans at the last minute. No matter which approach you’ve taken, the Virginia Society of CPAs advises that there are a number of tax breaks available for qualifying taxpayers paying education bills. Don’t miss out on this opportunity to offset your education costs.

Great tax credits

Tax credits are a valuable tax break because they reduce the amount of tax you owe. That generally has a bigger impact than a tax deduction, which simply lowers the amount of your taxable income. To qualify for an education tax credit, you must be a taxpayer who has paid taxes in the most recent year. In 2008, families who qualified for one program — the Hope Scholarship Credit — could receive a tax credit up to $1,800 for each eligible dependent attending their first two years of college. That’s broken down into a 100 percent credit for the first $1,200 of qualified education expenses for an eligible student, and 50 percent of the next $1,200 of qualified expenses for that student.

To understand how it works, assume that a family had one dependent who was in her first year of college, and that they owed $5,000 in taxes for the year. If they qualified for the highest credit amount, they would be able to reduce their taxes owed by $1,800, to $3,200.

The Lifetime Learning Credit

The Lifetime Learning Credit is another popular tax break that is different in some important ways from the Hope Credit. While students must take on a certain minimum college workload to qualify for the Hope Credit, it’s possible to qualify for the Lifetime Learning Credit while taking one or more courses to improve or gain new job skills. The Lifetime Credit can amount to as much as 20 percent of the first $10,000 of qualified educational expenses. So, those who qualify can receive as much as $2,000 per year for the total qualified expenses paid for yourself, your spouse or your dependents. The Lifetime Credit applies for all the years of postsecondary education or for courses taken to enhance job skills, while the Hope Credit is only available for the first two years of postsecondary education.

Income limits do apply

With both the Hope and Lifetime Learning Credits, the credit is phased out for single people with adjusted gross income (AGI) over $48,000 and eliminated altogether if your income is more than $58,000. For married couples filing jointly it is phased out for those with AGI between $96,000 and $116,000. (It is not available at all for those who are married but file separately.) The credit you receive also will vary based on the total tuition and expenses paid and whether the student has received any scholarships or other allowances. In addition, you cannot claim both the Hope Scholarship and Lifetime Learning Credits for the same student in the same year.

Remember tax deductions

It’s also possible for qualifying taxpayers to deduct qualifying higher education expenses from their gross income to arrive at adjusted gross income. Depending on your gross income and the total qualifying expenses, you can deduct up to $4,000 of tuition and fees paid to an eligible postsecondary institution for yourself, your spouse or a dependent claimed on your tax return.

Get more information

To get more information on education-related tax breaks, visit the Internal Revenue Service website at www.irs.gov. In addition, your local CPA can help you make the most of the options available to you. Consult your CPA about all your family’s financial needs.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.