Tax Benefits for Education

Restrictions

The Hope Credit you are allowed may be limited by the amount of your income, the amount of your tax or your filing status. Only one taxpayer (either the student or the parent) may claim this tax credit, and the student must not have a felony drug conviction on their record. The Hope Credit is available only for two years per eligible student, and only until the first two years of post-secondary education are completed. You may claim only one education tax credit — either the Hope Credit or the Lifetime Learning Credit — per student, per tax year.

If you pay qualified education expenses for more than one student, you can claim the Hope Credit for one student and the Lifetime Learning Credit for the other, in the same year.

Restrictions

The Lifetime Learning Credit you are allowed may be limited by the amount of your income, the amount of your tax or your filing status. Only one taxpayer (either the student or the parent) may claim this tax credit. In addition, you may claim only one education tax credit — either the Hope Credit or the Lifetime Learning Credit — per student, per tax year. If you pay qualified education expenses for more than one student, you can claim the Hope Credit for one student and the Lifetime Learning Credit for the other, in the same year

Student loan interest is interest you paid during the year on a loan you took out to pay qualified higher education expenses such as tuition and fees; room and board; books, supplies and equipment; or other necessary expenses such as transportation, that were:

1. for you, your spouse or a person who was your dependent when you took out the loan
2. paid or incurred within a reasonable period of time before or after you took out the loan, and
3. for education provided during an academic period for an eligible student

More Information

• Interest paid while a loan is not in repayment (such as forbearance or deferment) is also deductible
• You cannot claim the deduction if your parents claim you as a dependent on their taxes
• Eligibility is phased out for unmarried taxpayers with modified annual gross income of $55,000 to $70,000 (and $115,000 to $145,000 for joint filers); those with modified annual gross incomes of $70,000 and higher are not eligible
• You cannot use this deduction if you or anyone else claims a Hope or Lifetime Learning Credit for the same student in the same year

To qualify for tax-free treatment of canceled student loans, your loan must contain a provision that all or part of the debt will be canceled if you work:

• for a certain period of time
• in certain professions, and
• for any of a broad class of employers

Examples include working for volunteer organizations, performing military service and medical-related work in certain communities.

The loan must have been made by a qualified lender – the government, a tax-exempt public benefit corporation such as a municipal hospital, or an educational institution – to assist the borrower in attending an educational institution.

If you refinanced a student loan with another loan from an eligible educational institution or tax-exempt organization, that loan can also be considered as made by a qualified lender.

You cannot claim this deduction if your filing status is married filing separately or if another person is entitled to claim an exemption for you as a dependent on his or her tax return. The tuition and expenses must be for higher education. This deduction can reduce the amount of your taxable income by up to $4,000. This deduction is taken as an adjustment to income even if you do not itemize deductions, and may be beneficial to taxpayers who cannot take either of the education credits (the Hope Credit and the Lifetime Learning Credit) because their income is too high.

You may owe income tax on at least part of the amount withdrawn, but you may not have to pay the 10% additional tax on early withdrawals. The part not subject to the additional tax is generally the amount that is not more than the adjusted qualified higher education expenses for the year.

Qualified expenses include tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution; special needs services incurred by or for special needs students in connection with their enrollment or attendance; and room and board, if the individual is at least a half-time student.

IRS Publication 590, Individual Retirement Arrangements (IRAs) has more information about these IRAs.

You must meet the following conditions:

• the proceeds were used to pay qualified higher education expenses for yourself, your spouse, or a dependent for whom you claim as an exemption on your return
• your adjusted gross income is less than $82,100 ($130,650 if you are filing a joint return)
• your filing status is not married filing separately
• you were 24 or older before the bond's issue date