Education Tax Benefits
This section describes several tax benefits for educational expenses,
including the Hope Scholarship and Lifetime Learning tax credits, the
Tuition and Fees Deduction, the Student Loan Interest Deduction, and
employer education assistance.
Tax Benefits for Education
The education tax benefits include:
- Hope Scholarship Tax Credit
The Hope Scholarship provides a federal income tax credit of up to
$2,500 (40% refundable) per student based on the first $4,000 in
postsecondary tuition, fees and course materials paid by the taxpayer
during the tax year. The Hope Scholarship tax credit is 100% of the
first $2,000 and 25% of the second $2,000. The tax credit is limited
to the first four years of postsecondary education. The Hope
Scholarship tax credit is also known as the American Opportunity
Tax Credit (AOTC). The AOTC improvements to the Hope Scholarship will
expire at the end of 2017.
- Lifetime Learning Tax Credit
The Lifetime Learning provides a federal income tax credit of up to
$2,000 per taxpayer based on the first $10,000 in postsecondary
tuition and fees paid by the taxpayer during the tax year. The
Lifetime learning tax credit is 20% of the first $10,000. The tax
credit may be received for an unlimited number of years.
- Student Loan Interest Deduction
Borrowers of federal and private education loans may deduct up to $2,500
in interest as an above-the-line exclusion from income. This deduction
may be taken even if the taxpayer does not itemize.
- Employer Tuition Assistance
Your employer may provide you with up to $5,250 in employer education
assistance benefits for undergraduate or graduate courses tax-free
each year. The benefits must have been paid for tuition, fees, books,
supplies, and equipment. Travel, lodging and meals are not included.
Courses involving sports, games or hobbies are not included, unless
they are required as part of a degree program or are related to the
business of your employer.
(Payments above $5,250 may also be tax-free, if they represent a
working condition fringe benefit. This means that if you had paid for
the expenses, you would have been able to deduct them as an employee
- Tuition and Fees Deduction
Taxpayers may deduct up to $4,000 in tuition and fee expenses as an
above-the-line exclusion from income. This deduction may be taken even
if the taxpayer does not itemize. The deduction will expire at the end of 2013.
|Comparison of Education Tax Benefits|
||2010 Income Phaseouts
|$2,500 tax credit per student
100% of first $2,000
25% of second $2,000
(Tax credit is 40% refundable, not subject to AMT)
|Tuition, fees and course materials (textbooks)
||$80,000 to $90,000 (single)
$160,000 to $180,000 (joint)
|$2,000 tax credit
20% of first $10,000
|Tuition and fees
||$50,000 to $60,000 (single)
$100,000 to $120,000 (joint)
|Tuition and Fees
|$4,000 exclusion from income
Reduced to $2,000 in income phaseout band
|Tuition and fees
||$65,000 to $80,000 (single)
$130,000 to $160,000 (joint)
|Student Loan Interest
|$2,500 exclusion from income
||Student loan interest
||$60,000 to $75,000 (single)
$120,000 to $150,000 (joint)
|Education Bond Program
Exclusion from income of interest on Series EE bonds issued on or
after January 1, 1990 and all Series I bonds.
||Tuition and fees, or rollover into a 529 plan
||$70,100 to $85,100 (single)
$105,100 to $135,100 (joint)
|Employer Tuition Assistance
||$5,250 exclusion from income per student
||Tuition, fees, books, supplies, equipment
||Exclusion from income of amounts spent on qualified expenses if the student is a degree candidate and the scholarship is not payment for services. The full amount is exempt from FICA whether or not the student is a degree candidate.
||Tuition, fees, required course-related materials (books, supplies, equipment)
|529 College Savings Plans
Earnings are tax-deferred. Qualified distributions are excluded from
income. The earnings portion of a non-qualified distribution is taxed
at the beneficiary's rate and subjected to a 10% tax penalty.
||Tuition, fees, books, supplies and equipment, expenses for special needs services.
Room and board if enrolled at least half-time.
Income phaseouts are
the 2010 phaseouts.
Other related programs, such as section 529 plans
and Coverdell Education Savings Accounts, can be found
in the Saving for College section.
The page concerning
Education Tax Benefit Coordination
is also helpful when you're trying to maximize your benefits from the
various education tax benefits.
Additional information on these education tax benefits can be found
in IRS Publication 970, Tax Benefits for Education
See also IRS Form 8863 for more information on the Hope Scholarship and
Lifetime Learning tax credits.
Colleges use IRS Form 1098-T
to report qualified tuition and fees paid to the taxpayer by January
31. The information on IRS Form 1098-T helps you complete IRS Form 8863.
The IRS also publishes frequently asked questions about the
GAO Analyses of Education Tax Benefits
The US Government Accountability Office has issued three reports
concerning education tax benefits:
Multiple Higher Education Tax Incentives Create Opportunities for
Taxpayers to Make Costly Mistakes, May 1, 2008.
STUDENT AID AND POSTSECONDARY TAX PREFERENCES -- Limited Research
Exists on Effectiveness of Tools to Assist Students and Families
through Title IV Student Aid and Tax Preferences, July 2005.
STUDENT AID AND TAX BENEFITS -- Better Research and Guidance Will
Facilitate Comparison of Effectiveness and Student Use, September 2002.