Katrina Emergency Tax Relief Act of
Students that were effected by Hurricane
Katrina may be able to obtain
certain tax benefits for their educational
expenses. For details, see IRS
Federal Tax Benefits Help You
Pay for College
Doedtman said that one of the drawbacks to educations
credits is that eligibility phases out at
incomes between $43,000 and $53,000 ($87,000 and
$107,000 married/filing jointly).
This makes the tuition and fees deduction especially
desirable for taxpayers whose incomes are higher than
those limits. This deduction is above-the-line,
which means that you dont need to itemize to claim
it. Its for qualified tuition and related fees,
and the maximum deduction is $4,000, added Doedtman.
There are income limits for the deductions,
but they work differently than those for the credits.
Taxpayers whose income is no more than $65,000 ($130,000
married, filing jointly) can deduct the $4,000 or the
amount of their qualified expenses, if lower). Taxpayers
whose income is between $65,001 and $80,000 ($130,001
and $160,000 married/filing jointly) can deduct $2,000
or the amount of their qualified expense. Taxpayers
whose income is higher than $80,000 ($160,000) cannot
take any deduction.
Student Loan Interest Deduction
Taxpayers are allowed to deduct student
loan interest on loans (Stafford, PLUS, Consolidation
and Perkins and private education loans) for themselves,
their spouses, or children. The taxpayer may deduct
the remaining interest paid during the life of the loan
with a maximum deduction of $2,500.
Chan said that student loan interest is an above-the-line
deduction, meaning that you do not have to itemize your
deductions to get this deduction. Qualified expenses
include tuition, enrollment fees, books/supplies/equipment,
room and board, transportation, and other necessary
Doedtman noted that this tax deduction applies only
if the taxpayers income is less than $65,000 or
$135,000 if the taxpayer is married, filing jointly.
If a taxpayers income is greater than $50,000
or $135,000 for married, filing jointly, the deductible
amount will be phased down. Taxpayers are advised to
consult the chart on page 29 of the IRS Publication
970, which details the phase down.
Very few types of personal interest are deductible.
So it is a big deal
that student loan interest is. Take advantage of the
improving your education that the tax code provides,
Taxpayers can withdraw funds from their personal existing
without the 10 percent penalty, if they use the funds
to pay for the higher education for themselves, their
spouse, child or grandchild. The taxpayer is responsible
for paying for the federal income tax on the amount
that they withdraw, unless some other Roth IRA requirement
has been met - such as you are 59 ½ years old,
Students - undergraduate or graduate - can use the
expenses for tuition, enrollment fees, books/supplies/equipment,
room and board (if enrolled at least half time), and
expenses for special needs services.
Taxpayers are also allowed to borrow from a 401 (k)
fund to help fund higher education tuition and qualified
expenses, added Ginny DAngelo, vice president
of the student
loan department, Commerce Bank in Kansas City, Montana.
According to Chan, IRA withdrawals should be a last
resort. There are
lots of entities who are interested in helping fund
your education, but nobody else is going to give you
money to live on in retirement, Chan said.
Employer Provided Education Benefits
Employer provided educational
assistance may be excluded from an employees
income up to $5,250. The education does not need to
be job related and can be at the undergraduate or graduate
If your employer pays more than $5,250, the excess
will be included in your income and you can potentially
deduct or claim a credit for the excess expenses, Doedtman
It is important to know that employer-provided
tuition assistance cannot be used as the basis for any
tax benefit (Hope Credit, Lifetime Learning Credit)
by the recipient, Wilson added.
"People who can afford to pay for college without
incurring debt should do so, said Wilson. There
are many good reasons to finance your education, but
tax benefits should not be among them. Tax benefits
are nice for those students who need to borrow to go
to college, but they should not constitute a reason
to borrow," he cautioned.
Doedtman agreed. Tax credits are highly desirable
solely because they reduce your tax. For example, a
$1,500 tax credit will reduce the tax you owe by $1,500.
However, if the tax you owe isnt as as much as
the credit youre eligible for, you wont
get the difference refunded to you."
College is an investment, said Korsvall.
Tax season is a time when students receive a return
on that investment.
Sharon Reed Abboud is a Northern Virginia-based freelance
Publication 970: Tax Benefits for Education.
Comprehensive overview on federal tax benefits for higher
education from the Internal Revenue Service.
Association of Student Financial Aid Administrators.
Provides an online guide to Federal tax benefits for
tuition and fees (for tax year 2005).
Tax Breaks for Higher Education - University of Illinois Guide.
Good overview on education tax breaks and how to make
the most of them.
Disclaimer: The author and publisher of the information
cited in this article are not responsible for any errors,
omissions or changes in tax code. Visit the
IRS Website or call the IRS at 1-800-829-1040 (TDD
1800-829-4059) for information. Please consult with
a tax professional before filing your tax return.
Savings for Higher Education: Students Often Miss Out
and Financial Aid.