College-Related Federal Tax Benefits
The U.S. Internal Revenue Service offers the following credits, deductions, and other tax benefits to families with individuals enrolled in, saving for, or paying off college:
American Opportunity Tax Credit
Credits 100% of a student's first $2,000 in tuition, fees, and course materials and 25% of the next $2,000. Maximum credit available is $2,500. 40% of the credit is refundable.
Lifetime Learning credit
The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses paid for eligible students. The maximum of lifetime learning credit you can claim is $2,000 (20% x $10,000). There is no limit to the number of years the lifetime learning credit can be taken. This is a nonrefundable credit.
Student loan interest deduction
The student loan interest deduction is an adjustment to income for the taxpayer and is a dollar for dollar deduction for the amount of student loan interest paid up to up to $2,500 per year for life of a student loan.
Student loan cancellations and repayment assistance
Under certain specific circumstances, the cancellation or a student loan or the receipt of repayment assistance for a student loan may be tax-free to the taxpayer. Consult IRS Publication 970 to find the limited conditions upon which cancellation or repayment assistance may be tax-free.
Coverdell Education Savings Account (ESA)
Can contribute up to $2,000/yr. for a beneficiary until the age of 18. Contributions grow tax-free. Withdrawals from an ESA may be made tax-free if the beneficiary has qualified educational expenses of at least the amount withdrawn.
Qualified Tuition Programs (“529 plans”)
Can contribute up to the amount of qualified education expenses. Such accounts can be maintained by states or other eligible institutions. Contributions grow tax-free. Withdrawals may be used for eligible expenses or enrollment or attendance at an eligible educational institution. Withdrawals are tax-free if the beneficiary has eligible expenses equal to at least the amount withdrawn.
Education Exception to Additional Tax on Early IRA Distributions
You can take a distribution from your IRA before age 59 1/2 without having to pay the 10% early distribution penalty if money is used for qualified education expenses.
Education savings bond program
Qualified U.S. savings bonds can be cashed without including the interest from the bonds as taxable income if the bond is used to pay for qualified education expenses.
Employer-provided educational assistance
Employers can exclude up to $5,250 of the educational assistance each year from the employee's taxable income.
For more information about these tax benefits, review the IRS's most recent Publication 970: Tax Benefits for Education at IRS.gov .
