Education Tax Benefits You Should Know About

Taxes are a complicated matter for a vast majority of people. Mentioning mathematics or accounting alone will have most people fleeing – add taxes to the mix and things can get ugly. Unfortunately, as the saying goes, “nothing is certain but death and taxes”. There is no escaping the long arms of the IRS, but there is also some good news – with a little help, you could take advantage of significant tax breaks, minimizing the taxes you have to pay. These include provisions in tax laws, allowing for education benefits to help pay for the college education of your children, your spouse, or even yourself.

Tax Credits

Tax credits generally reduce the income taxes you have to pay. According to the IRS, “if the credit reduces your tax to less than zero, you may get a refund.” The American Opportunity Tax Credit (AOTC) can lower your taxes by a maximum of $2,500 per eligible student every year for the first four years of education. The Lifetime Learning Credit (LLC) is worth $2,000 per year for an unlimited number of years, and can be used even for graduate and professional degrees and “courses to acquire or improve job skills.” For the AOTC, your modified adjusted gross income or MAGI must be $80,000 or less ($160,000 or less for married couples filing jointly). For the LLC, your MAGI must be less than $62,000 ($124,000 for married couples filing jointly) for a partial credit and $52,000 ($104,000 for married couples filing jointly) or less for the full credit. Note, however, that you can only avail of either the AOTC or the LLC, but not both.

Tax Deductions

Tax deductions reduce the amount of your income that is subject to tax. You can deduct tuition and other qualified higher education expenses up to $4,000 per year. The MAGI ceiling for this is $80,000 ($160,000 for married couples).

Interest Deductions for Student Loans

If your MAGI is less than $75,000, you may be eligible for a deduction for the interest you pay on a student loan (up to $2,500). A student loan is a loan you took out solely to pay for education expenses, such as tuition, accommodations, books and other supplies, equipment, and important expenses such as transportation.

Tax-Free Savings Accounts

529 plans and Coverdell Education Savings Accounts (ESAs) allow your earnings and withdrawals to be tax-free when used to pay for qualified higher education expenses.
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529 plans, in particular, have no MAGI or age restrictions, and can allow you to contribute as much as $300,000 over the life of the account. It can also cover computer technology and equipment, internet access, and related services.

ESA’s, on the other hand, can be used to pay for eligible K-12 expenses, as well as post-secondary expenses. However, it is subject to an income ceiling of $110,000 ($220,000) and an annual contribution of $2,000 per child. The beneficiary must also be under 30 years old.

Government Bonds

Series EE Bonds and I Bonds, when redeemed to pay for a child’s tuition, are also exempt from taxes on the interest earned. Said bonds must be in your name or the name of you and your spouse, not in the name of your child. As of 2012, your MAGI should be smaller than $87,850 ($139,250).

Bottom Line

As you can see, you may be able to take advantage of several tax breaks for educational expenses or certain combinations thereof. In choosing which one/s to avail of, considerations include eligibility and determining which one/s can give you the highest returns overall. To make sure you don’t miss out on the maximum education tax breaks you are entitled to when saving for the future, get the help of an expert.

Khaled Hazzouri has over 16 years of expertise in helping people reduce their taxes to the minimum allowable under tax law. Hazzouri Accounting is based in Canton, MI and is committed to serving the local community and forming lasting relationships with our clients. Call us today at (734) 844-1614 or use our contact form and we will be happy to help you with all your taxation needs.

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