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Katrina Emergency Tax Relief Act of 2005

Students that were effected by Hurricane Katrina may be able to obtain certain tax benefits for their educational expenses. For details, see IRS publication 4492.

Federal Tax Benefits Help You Pay for College
(Continued)

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 don’t need to itemize to claim it. It’s 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 expenses.

Doedtman noted that this tax deduction applies only if the taxpayer’s income is less than $65,000 or $135,000 if the taxpayer is married, filing jointly. If a taxpayer’s 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 possibilities of improving your education that the tax code provides,” Doetman said.

IRA Withdrawals

Taxpayers can withdraw funds from their personal existing IRA, 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, stressed Doedtman.

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 D’Angelo, 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 employee’s income up to $5,250. The education does not need to be job related and can be at the undergraduate or graduate level.

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 advised.

“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.

Concluding Advice

"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 isn’t as as much as the credit you’re eligible for, you won’t 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 writer.


Additional Resources
IRS Publication 970: Tax Benefits for Education.
Comprehensive overview on federal tax benefits for higher education from the Internal Revenue Service.

National Association of Student Financial Aid Administrators.
Provides an online guide to federal tax benefits for tuition and fees.

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.

See also Tax Savings for Higher Education: Students Often Miss Out and Financial Aid.

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