Tax Benefits of Paying for College

What are qualified higher education expenses?

What's the history behind the higher education tax benefits?

For many students and their parents, tax season is a time of grumbling and groaning. Forms, paperwork, and the April 15 tax filing deadline can add stress to an already hectic life. But if you're paying off student loans or paying for college tuition and fees, your higher education investment might help you in a way you didn't expect — by reducing your tax bill.

There are three higher education related tax benefits that students and parents may be able to take advantage of:

The student loan interest deduction can reduce the taxable income of many student and parent loan borrowers based on the amount of interest paid by the borrower or on the borrower's behalf over the tax year.
The tuition and fees deduction can reduce the taxable income of taxpayers based on college tuition and fees paid during the tax year.
The Hope and Lifetime Learning tax credits allow many taxpayers to claim a credit against their federal income taxes for college tuition and fees paid during the tax year.

Student Loan Interest Deduction

Student and parent borrowers may be able to claim the student loan interest deduction, under which borrowers may deduct interest payments they made on their higher education loans during the 2008 tax year. The deduction allows a borrower to reduce his or her total taxable income by as much as $2,500.

The student loan interest deduction can be of particular value to recent college graduates. Unlike tax credits that require a taxpayer to earn a large enough income to take advantage of them, the student loan interest deduction is restricted to taxpayers at or below a maximum income and reduces the amount of the taxpayer's income subject to federal taxes prior to the application of other tax deductions.

What Interest Is Eligible?
For a taxpayer to claim the interest deduction, the interest paid must meet certain conditions:

The interest amounts paid must have been for a loan obtained for the taxpayer, his or her spouse, or someone who was his or her dependent at the time the loan was taken out.
The interest paid must have been for a loan obtained only for the payment of college tuition and qualified related expenses.
Revolving lines of credit such as credit card debt may also qualify when used by a borrower exclusively to pay qualified higher education expenses.

Interest that has been paid by a third party on the borrower's behalf qualifies.

Interest that a borrower has paid on a loan even when interest payments are not required (such as when a Stafford loan is in deferment status) can also qualify.

Payment of loan origination fees and capitalized interest can be included as qualified interest payments.

Interest Deduction Income Limits
The following income limits apply to a taxpayer's eligibility to claim the student loan interest deduction on his or her 2008 income tax return:

A single filer whose Adjusted Gross Income (AGI) is less than $55,000 is eligible to receive the full deduction; a single filer whose AGI is between $55,000 and $70,000 is eligible for a reduced deduction.
A married couple filing a joint return whose AGI is less than $115,000 is eligible to receive the full deduction; a married couple filing a joint return whose AGI is between $115,000 and $145,000 is eligible for a reduced deduction.
A single filer whose AGI is $70,000 or greater is not eligible to receive the student loan interest deduction. The same is true for a married couple filing a joint return with an AGI of $145,000 or greater.
A taxpayer who is claimed as a dependent, or a taxpayer whose tax filing status is married filing separately from his or her spouse is not eligible to claim the deduction.
If the loan is from a related party or a qualified employer plan, the taxpayer may not claim the deduction.

How Do I File for a Deduction?
The student loan interest deduction is an adjustment to income. To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 32 (Form 1040NR), or line 9 (Form 1040NR-EZ). Go to http://www.irs.gov/formspubs/index.html to access the forms.

Tuition and Fees Deduction

The tuition and fees deduction allows a taxpayer to deduct as much as $4,000 from his or her taxable income for qualified education expenses, such as tuition and fees*, paid for the taxpayer and the taxpayer's spouse or dependents.

* For 2008, the definition of qualified education expenses is expanded for students attending an eligible educational institution in the Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin.

For the current tax filing season, qualified higher education expenses paid in 2008 for enrollment during that year or for an academic period beginning any time from January 1, 2008, to March 31, 2009, may be applied towards the tuition and fees deduction.

The deduction may not be claimed for tuition and fees applied towards either the Hope tax credit or the Lifetime Learning tax credit in the same tax year.

Tuition and Fees Deduction Income Limits
The following income limits apply to a taxpayer's eligibility to claim the tuition and fees deduction on their 2008 income tax return:

A single filer whose Adjusted Gross Income (AGI) is $65,000 or less is eligible for the full deduction.
A married couple filing a joint return whose AGI is $130,000 or less is eligible for the full deduction.
A single filer whose AGI is more than $65,000 but less than $80,000 has a reduced maximum deduction of $2,000.
A married couple filing a joint return whose AGI is more than $130,000 but less than $160,000 has a reduced maximum deduction of $2,000.
A single filer whose AGI is more than $80,000 is not eligible to receive the tuition and fees deduction. The same is true for a married couple filing a joint return whose AGI is more than $160,000.
A taxpayer whose tax filing status is married filing separately from his or her spouse is not eligible to claim the deduction.

How do I File for a Deduction?
The tuition and fees deduction may be claimed by completing Form 8917 and submitting it with the Form 1040 or Form 1040A. Enter the deduction on Form 1040, line 34, or Form 1040A, line 19. Go to http://www.irs.gov/formspubs/index.html to access the Form 1040.

Hope and Lifetime Learning Tax Credits

The Hope and Lifetime Learning tax credits help a taxpayer offset the costs of higher education by directly reducing the amount of his or her income tax.

Both credits are claimed for qualified tuition and related expenses paid during the tax year. However, a taxpayer may only claim one credit against a student's higher education expenses for a particular tax year. Also, neither credit may be claimed if a taxpayer chooses to utilize the tuition and fees deduction.

Tax Credit Comparison

Hope Credit	Lifetime Learning Credit
Only available for first two years of student's higher education	Available for all years of student's higher education and for courses to acquire or improve job skills
Maximum annual amount of $1,800 per student*	Maximum annual amount of $2,000 per tax return
Student must be pursuing undergraduate degree or other recognized education credential	Student need not be in a degree program of any kind
Student must have been enrolled at least half time during at least one academic period beginning in the tax year	Available for student taking one or more college courses
Student must not have had a felony drug conviction on his or her record at the end of the tax year	No restrictions regarding drug convictions

* For tax years beginning in 2008 and 2009, the education credits are expanded for students attending an eligible educational institution in a Midwestern disaster area.

Tax Credit Income Limits
For tax year 2008, the following income limits apply:

A single filer whose AGI is less than $58,000 is eligible to claim a credit.
A married couple filing a joint return whose AGI is less than $116,000 is eligible to claim a credit.

In 2008, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your AGI is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return).

How to Claim a Credit
In order to claim either credit, a tax filer must complete and submit Form 8863, "Education Credits (Hope and Lifetime Learning Credits)," using the information on the Form 1098-T sent by the school to the taxpayer; along with his or her Form 1040 or Form 1040A.

TG provides this information as a public service and does not provide individual tax advice. You may wish to review your individual eligibility for these tax benefits with your tax advisor.