Tax Incentives for Education

"Tax Incentives for Education" submitted by SchoolGrantsfor Editorial Team and last updated on Sunday 8th January 2012

Table of Contents

Between federal and state taxes, most of you end up missing at least 33% of your gross income. In August of 1997, the Taxpayer Relief Act of 1997 was signed into law.

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Taxable Income

Payments are 15 percent of your discretionary income (your taxable income minus 150 percent of the poverty level). Payments can be as low as $0 and unpaid interest may be subsidized by the federal government for up to three years. After 25 years of qualifying payments, any remaining balance will be forgiven and considered taxable income.

Tax Credits and Deductions

You can claim tax credits or, in some cases, deductions, for expenses that you pay for post secondary education for yourself, your spouse, or your dependent children. The Hope tax credit is available on a per-student basis for the first two years of post-secondary education, whereas the Lifetime Learning credit is available on a tax-return basis and covers a broader time frame and range of educational courses. An “above-the-line” deduction, provides some relief to families whose income is too high to qualify for the Hope and Lifetime Learning tax credits. Education expenses paid for with tax-free grants, scholarships, and employer provided tuition assistance are not eligible for the credits or for the above-the-line deduction. However, education expenses paid for with loans are eligible for these tax benefits.

Tax Incentives to Save for College

In recent years, tax-advantaged programs to help families save for college have become more flexible. Prepaid tuition plans allow families to buy units of tuition and guarantee that these units may be redeemed for a portion of tuition in future years. A number of states offer such plans, and private colleges may also set up prepaid tuition plans. Qualified state tuition savings programs provide for market-based investment accounts with tax-deferred earnings. Withdrawals from state college savings and prepaid programs, known as section 529 plans, to pay qualified higher education expenses will be free from federal (and, in many cases, state) income taxes. Withdrawals from Coverdell Education Savings Accounts (ESAs) may be used to cover qualified elementary and secondary expenses at public, private, and religious schools in addition to expenses for higher education.

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The benefits of this new law include education tax credits, a new education IRA, penalty-free withdrawals from traditional IRAs for education expenses and a deduction for student loan interest. Check: Federal Taxation of financial aid for students

Income Limitations on the Education Tax Credits:

The full value of the education tax credits is available to married taxpayers filing jointly with an adjusted gross income (AGI) of $110,000 or less and to single taxpayers with an AGI of $55,000 or less.

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