Claim tax credits and deductions for education

Tax credits

  • Hope Scholarship Tax Credit
    • Families may receive up to $1,500 per student during the student’s first two years of college (based on tuition and fees paid for education expenses).
    • Available for students who are enrolled at least half time in a degree or certificate program, have not completed the first two years of a postsecondary education and who do not have any felony drug convictions.
    • Only tuition and certain education expenses that must be paid to the institution as a condition of enrollment or attendance can be counted toward this credit.
    • Students must be listed as dependents on the tax return to be eligible to claim the Hope tax credit.
  • Lifetime Learning Tax Credits
    • May be claimed up to $2,000 after the first two years of postsecondary education if you pay for the education-related costs.
    • Eligible students must be enrolled in at least one postsecondary course, but do not need to be pursuing a degree.
    • Equal to 20 percent of the first $10,000 of qualified expenses paid.
    • Tuition and related fees are included, but excluded are room, board, books, supplies and other living expenses.
    • The student must be listed as a dependent on the tax return of the individual who is claiming the credit.
    • This credit is figured on the basis of one credit per tax return, regardless of how many dependent students are involved.

Tax deductions

  • College Tuition Deduction
    • Available for the 2006 and 2007 tax years.
    • Allows individuals who earn $65,000 or less ($130,000 for married couples filing joint returns) to deduct up to $4,000 in higher education expenses.
    • Allows individuals earning up to $80,000 ($160,000 for married couples filing joint returns) to deduct up to $2,000 in higher education expenses.
    • Contact the IRS or a tax advisor for more information.
  • Student Loan Interest Deduction
    • Allows eligible student loan borrowers to deduct up to $2,500 of interest paid.
    • Loan must have been used to pay for tuition and/or other higher education expenses, which may include fees, room & board, books, supplies, or equipment.
    • Student must have been enrolled at least half-time in a program that led to a degree, certificate or other recognized educational credential.
    • Contact the IRS or a tax advisor for more information.

Other tax-related information

Other ways of receiving tax credits or tax deductions on the cost of higher education include Education IRA withdrawals and educational assistance provided by an employer (tuition reimbursement programs). Check with your employer or a tax advisor for further details.

Taxpayers cannot claim the Hope or Lifetime Learning credit when taking a tax-free distribution from an Education IRA, so weigh your choices carefully. For more information, contact a tax advisor or visit the Internal Revenue Service (IRS) website. Also available online is IRS Publication 970, which outlines all of the current education tax benefits.

  • Borrowing from home equity
    • Proceeds of a home equity line of credit do not count as income.
    • Interest on a home equity line of credit is often fully tax-deductible.
    • The interest rate on a home equity line of credit is usually higher than the rates on federal education loans.
  • Borrowing from 401(k)
    • Less-favorable option than educational loans, which offer low interest rates and tax-deductibility.
    • May be valuable last option for those who have regularly saved in their 401(k)s and have children in or near college age.
    • If funds are borrowed from a 401(k) and then you leave your current employment, the entire loan must be repaid immediately.