Education Tax Rules
Parents facing college expenses have several provisions in the tax law to consider. The benefits don’t apply to all, but there is something of interest for many families.
The American Opportunity Tax Credit (formerly The Hope Credit) is available for certain tuition and fees, and it allows you to reduce taxes annually up to $2,500 per student for four years of college. The credit is equal to 100% of the first $2,000 of qualified expenses and 25% of the next $2,000, per student.
The Lifetime Learning Credit covers any year of post-secondary education, with a maximum credit of $2,000, no matter how many students in the family are eligible.
Both the American Opportunity Tax Credit and lifetime learning credits phase out for taxpayers with higher incomes.
Other Education Tax Incentives
Education savings accounts. You may establish an education savings account (previously called an education IRA) with a nondeductible contribution for any child under 18. The annual contribution limit is $2,000. Funds can accumulate and be paid out tax-free for qualified college expenses, including tuition, fees, books, supplies, equipment, and certain room and board costs. The funds can also be used to pay for elementary and secondary (K-12) school expenses at public, private, or religious schools. Eligibility for an education savings account starts phasing out at $95,000 of AGI for single taxpayers and $190,000 for married folks.
Individual retirement accounts (IRAs). Existing IRAs can also be a source of college funds. You may make withdrawals before age 59½ without penalty for amounts paid for college or graduate school tuition, fees, books, room and board, supplies, and equipment.
Education savings bonds. Interest on Series EE and Series I bonds issued after 1989 is nontaxable when used to pay tuition and fees for you or your dependents. This tax break begins to phase out once income reaches certain levels.