The good news is that the tax law is filled with opportunities for the parents of current and future college students; tax breaks that will save your family money. Saving you money is our goal. Here's a quick summary of the education benefits in the tax law. Note, however, that many of these breaks are not available to taxpayers whose incomes exceed thresholds set by Congress.
HOPE credit: The Hope credit is worth up to $1,650 per eligible student for qualified tuition and related expenses for each of the first two years of college for yourself, your spouse or your dependent children. Remember, a credit reduces your tax liability dollar for dollar so, in effect, Uncle Sam is offering to pay $1,650 of tuition for each of your children's freshman and sophomore years of college or vocational school.
Lifetime learning credit: The lifetime learning credit provides for a credit of $2,000 (per tax return, not per student) for qualified tuition and related expenses for any year in which the HOPE credit is not available for those expenses.
Coverdell Education Savings Accounts: The law allows contributions of up to $2,000 per beneficiary (child) per year to an education savings account — formerly called an Education IRA — for education expenses. Earnings grow tax-deferred and are tax-free if used to pay education expenses. In the past, only college bills counted for tax-free treatment of ESA funds, but now primary and secondary education expenses can be paid with tax-free dollars.
Deduction of interest on student loans: Taxpayers can deduct $2,500 on 2006 returns of interest paid during the tax year on any qualified student loan.
Deduction for college costs. Parents and nondependent students can take an "above-the-line" deduction (meaning it's available whether or not you itemize) for up to $4,000 of college costs 2005 returns.
Qualified state tuition programs: Until 2002, earnings on money saved in state prepaid-tuition and college savings plans were taxed in the student's tax bracket when used to pay qualifying college expenses (including room and board). Now, those earnings are completely tax-free.
Congress has also clarified or expanded the following provisions:
IRAs: Taxpayers may make penalty-free early withdrawals from regular and Roth IRA accounts for education purposes.
Cancellation of student loans: Under certain conditions, loans forgiven by schools and foundations will not be considered taxable income.
Additional education benefits:
Tax-free U.S. savings bond interest: You may exclude from income the interest on Series EE savings bonds purchased after 1989 and used to pay education expenses.
Employer-provided educational assistance: You are not taxed on up to $5,250 of non-job-related employer-provided educational assistance. Graduate as well as undergraduate courses can now be paid for with this tax-free fringe benefit.
Deduction of cost of education as business expense: If you have your own business or are an employee, you may be able to deduct the costs of education as a business expense.
Exclusion of qualified scholarships: Certain scholarships are not included in income and therefore do not generate any tax.
Click a topic on the left for more details on the education breaks and links to relevant areas in TaxCut and on the Internet.