Earning a diploma is costly, time consuming, and hard work. Committed students usually see their education through to the end, but at some point, funding tapers off and money becomes an obstacle. Whether you are in your first year of college or your fourth, there are tax benefits available to either you or your parents that can significantly reduce the cost of college tuition. Investigating your options is the only way to make sure that you are taking advantage of the tax benefits available to you.
The Hope Credit, the Lifetime Learning Credit, Student Loan Interest Deduction, and a Tuition and Fees Deduction are some of the main ways that students and parents receive tax benefits. Each option has different advantages so it is important to research each thoroughly so that you choose the most rewarding tax benefit. Below is a summary of the information provided in IRS Form 970. Note that there are exemptions for each option and eligibility requirements that must fulfilled. If you are above a particular income bracket you may not qualify for education deductions or credits.
The Hope Credit allows students who claim themselves or parents of a college student to claim a $1500 tax credit each year. This credit option is only available during the first two years of post-secondary education. Students must be enrolled at part-time or full-time status to qualify.
Note: The Hope Credit should not be confused with the Hope Scholarship which, although another well-known source of college funding, is not tax-related. The Hope Scholarship is a merit-based, lottery-funded, and state-dependent form of college aid. Once known for being the Georgia Hope Scholarship, it has now spread to other states. The South Carolina Hope Scholarship, Maryland Hope Scholarship, and Tennessee Hope Scholarship funds are quickly gaining in popularity. If you are not from Tennessee, perform a free scholarship search at Scholarships.com to see if an award similar to the Tennessee Lottery Scholarship is available in your state. If you are, conduct a free search because it's free and who knows what other scholarships, grants or fellowships you might qualify for?
The Life Time Learning Credit allows eligible students to claim a $2,000 tax credit each year. Unlike the Hope Credit, students can claim this credit throughout their entire college career—be it 2 years or 6. Students must be enrolled in at least one class to qualify.
This reduction allows eligible participants to reduce their taxable income by $2,500 each year. The loan cannot be taken from a relative or employer and its purpose must be purely educational. Interest paid throughout the life of the loan can be deducted until the debt is absolved.
This tax option can reduce your taxable income by up to $4,000. This deduction is solely for tuition and fees; it does not include any other expenses associated with school like room and board. For more detailed information about the tax benefits of higher education, visit the Internal Revenue Service website.
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