Education
Credits & Deductions |
The education of your children, or even of yourself and your spouse, can be a major investment. Knowing if your college-age child is still a dependent, what scholarships are taxable, and which tax credits are available can be confusing. Keep the following in mind when preparing your tax return. Dependents Students are allowed to take a standard deduction even if they are
not claiming themselves. The standard deduction amount may be affected
if the student has any unearned income. Amounts received by a scholarship candidate for services such as teaching or research are taxable income even if providing such services is a required condition for receiving the scholarship or grant Scholarship prizes won in a contest are not considered scholarships/fellowships if not designated to be used for educational purposes only. These must be included in your gross income. Veterans Affairs payments are not considered scholarships and are not included in income. Student Loan Interest Deduction Deduction for Qualified Higher Education Expenses This deduction is not available:
The Coverdell Education Savings Account (ESA), formerly called an Education IRA, is a custodial or trust account for the sole purpose of paying for the qualified education expenses of the designated beneficiary. In addition to higher education expenses, qualified expenses include certain elementary (including kindergarten) and secondary public, private, or religious school tuition and expenses. Expenses include tutoring, computer equipment, software and services, room and board, uniforms, extended-day program costs, and the expenses of a special needs individual that are necessary for that person's enrollment or attendance at an eligible educational institution. The parent or guardian of a child under age 18 must set up this account. The maximum total of all contributions for any one child cannot be more than $2,000 per tax year. The contributions are not tax deductible but earnings are tax-free to the beneficiary if they are used to pay for qualified education expenses. A 10% penalty may apply to a distribution that is not applied to qualified education expenses. Contributions to a Coverdell ESA are considered a gift from the contributor to the beneficiary and are eligible for the annual gift tax exclusion. Qualified Tuition Programs (QTPs) Higher Education Credits The Hope Credit-You may be able to claim a Hope Credit of up to $1,500 for the qualified tuition and related expenses paid for each eligible student. This credit can be claimed for only the first two years of postsecondary education for each eligible student. The student must be enrolled at least half time in a qualified program and must not have been convicted of a felony charge drug offense. The Hope Credit allows you to claim 100% of the first $1,000 plus 50% of the next $1,000 you pay for each eligible student's qualified tuition and related expenses. The Lifetime Learning Credit-You may be able to claim a maximum Lifetime Learning Credit of up to $2,000 each year for the total qualified tuition and related expenses paid during the tax year for all eligible students who are enrolled in eligible educational institutions. Unlike the Hope Credit, the Lifetime Learning Credit is not based on the student's workload and is not limited to the first two years of postsecondary education. Expenses for graduate-level degree work are eligible. Both of these credits are nonrefundable and may be reduced based on your income. You may claim the Hope Credit for two years of a student's postsecondary education and claim the Lifetime Learning Credit for that same student in later tax years. You can claim the Hope Credit for one child and the Lifetime Learning Credit for another child in the same tax year. College students who pay expenses using a Coverdell Education Savings Account, a Qualified Tuition Program, or education savings bond funds may also claim an education credit if the credit is claimed for expenses different from those paid for using the tax-free distributions from these funds. The Hope Credit and Lifetime Learning Credit are not available if the taxpayer's filing status is Married Filing Separately. You cannot claim either the Hope Credit or the Lifetime Learning Credit for a student in the same year you are claiming the tuition and fees deduction for that student. Education Savings Bond Program |
