Students and families who paid college expenses during 2007 may qualify for higher-education deductions or credits when they file their federal income-tax returns.
Tax-law changes in recent years have added and expanded higher-education tax benefits. As you prepare your 2007 federal income-tax return, check to see if you qualify for savings under these tax-law provisions.
Consider these additional resources.
Student-loan-interest deduction
You may be able to reduce your taxable income by up to $2,500 for interest paid during the tax year on your student loans.
Income limits. Partial deduction for single taxpayers with modified adjusted gross incomes of between $55,000 and $70,000, and for married taxpayers filing jointly with modified adjusted gross incomes of between $110,000 and $140,000. Full deduction available for single taxpayers with modified adjusted gross incomes below $55,000 and married taxpayers filing jointly whose incomes are below $110,000.
Other information. Deductible interest includes loan-origination fees, capitalized interest and voluntary interest payments on loans taken out solely to pay qualified educational expenses for a student enrolled at least halftime. Interest paid on loans from a relative or made under a qualified employer plan does not qualify for the deduction. You can claim this deduction even if you don’t itemize deductions.
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Hope Tax Credit
You may reduce your federal income tax by as much as $1,650 per student for out-of-pocket tuition and fees for each of the first two years of study toward a degree or certificate from a college or vocational school. Students must be enrolled at least half-time to qualify.
Income limits. If you are single and have a modified adjusted gross income of $57,000 or more, or married, filing jointly, with a modified adjusted gross income of $114,000 or more, you do not qualify for this credit. If you’re single, and your modified adjusted gross income is greater than $47,000 but less than $57,000 — or married, filing jointly, with a modified adjusted gross income greater than $94,000 but less than $114,000 — you may qualify for a partial credit.
Other information. You cannot claim both the Hope Tax Credit and Lifetime Learning Credit for the same student for the same year.
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Lifetime Learning Credit
You may be able to reduce
your federal income tax by as much as $2,000 for qualified tuition and related expenses
paid for students enrolled in an eligible postsecondary institution. The
maximum credit equals 20 percent of the first $10,000 of qualified expenses.
Income limits. Same as for the Hope Tax Credit.
Other information. The Lifetime Learning Credit is available for any year of education beyond high school, including vocational, college, graduate and professional education. The student does not need to be pursuing a degree or certificate to qualify, and the credit is available for students taking one or more courses. You cannot claim both the Hope Tax Credit and Lifetime Learning Credit for the same student for the same year.
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Deduction for higher-education expenses
You may be able to reduce your taxable income by up to $4,000 for qualified higher-education expenses that you paid during the tax year. This deduction may benefit you if your income is too high to qualify for either the Hope or Lifetime Learning credits.
Income limits. If you are a single taxpayer with a modified adjusted gross income of $65,000 or less, or married with modified adjusted gross income of $130,000 or less, and you file a joint return with your spouse, you may qualify for the full deduction. If your income exceeds the limit for the full deduction, you may qualify for a deduction of up to $2,000 if you are a single taxpayer with a modified adjusted gross income of up to $80,000 or a married taxpayer with a modified adjusted gross income of up to $160,000 and filing jointly.
Other information. In
general, higher-education expenses that qualify for the deduction are tuition
and fees paid for you or your spouse or dependent. You may include
student-activity fees and fees for course books, supplies and equipment if you
were required to pay those fees to the institution in order to attend. Room and
board is not an eligible expense, however. You may not claim this deduction and
higher-education tax credits — such as Hope or Lifetime Learning credits — for
the same student in the same year. You can claim this deduction even if you
don’t itemize deductions. Visit the Internal Revenue Service Web site for special instructions for filing this deduction.
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Employer-provided education benefits
You may be able to exclude from your taxable income up to $5,250 in higher-education assistance provided by your employer each year.
Other information. Undergraduate- and graduate-education assistance qualify for this tax benefit. Eligible employer-provided education benefits include payments for tuition, fees, books, supplies and equipment.
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529 college-savings plans
You may be able to exclude from your taxable income earnings from qualified-tuition programs, commonly known as 529 savings plans, that you used to pay qualified education expenses. These plans permit you to prepay or invest to pay higher-education expenses.
Other information. To qualify for this benefit, you must have used the proceeds of a 529-plan distribution for tuition, fees, books, supplies and equipment at a qualified higher-education institution. In the case of room-and board costs, check with the educational institution to determine the amount considered “reasonable” for that school for the deduction.
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Coverdell Education Savings Accounts
You may contribute up to $2,000 annually to a Coverdell Education Savings Account, formerly known as education IRAs, on behalf of a designated beneficiary who is younger than age 18 or is a special-needs beneficiary, to pay qualified education expenses. Although these contributions are not tax-deductible, they will grow tax-free until withdrawn.
Income limits. If you're single, and your modified adjusted gross income is less than $95,000 — or married and filing jointly with a modified adjusted gross income of less than $190,000 — you can contribute the maximum amount. If you’re single and your modified adjusted gross income is between $95,000 and $110,000 — or married and filing jointly with a modified adjusted gross income of between $190,000 and $220,000 — you may make a reduced contribution.
Other information. Proceeds of Coverdell accounts may be used to pay certain elementary- and secondary-education expenses, as well as expenses for postsecondary studies. Contributions to Coverdell accounts and 529 plans are permitted for the same beneficiary in the same year. You may take a tax-free distribution from a Coverdell account in the same year that you claim a Hope or Lifetime Learning credit, as long as you don’t use your Coverdell-account distribution for the same expenses for which you claimed the credit.
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Credit or deduction, which is better?
If you qualify, a tax credit generally is more beneficial than a deduction. A credit directly reduces the tax that you owe. A deduction reduces the amount of your income that is taxable. To determine the value of a deduction, multiply the amount of the deduction by your tax rate.
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More information
Please
note that this information is intended as a general summary of these tax benefits. To determine your eligibility for any of these benefits, you should consult a qualified tax adviser or the IRS, on the Web at www.irs.gov, or by calling (800) 829-1040.
For additional information, order IRS Publication 970, “Tax Benefits for Education.”
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