Education Tax Benefits

1) Credits:
American Opportunity Credit. This education credit is available to parents or students for 2009 and 2010 and allows up to $2,500 per student to offset a taxpayer's income tax. The credit is available for the first four years of postsecondary education, and 40% of the credit is refundable for most taxpayers. This benefit is available to a broader range of taxpayers as the threshold (adjusted gross income of $180,000 if married and filing jointly; $90,000 if single, head of household, or qualifying widow(er)) at which this credit is reduced is higher than that for the Lifetime Learning Credit.

The Lifetime Learning Credit. This credit can be claimed for undergraduate, graduate, and professional degree courses—including courses to improve job skills—regardless of the number of years in the program. Eligible taxpayers may qualify for up to $2,000 per tax year. This credit is available to taxpayers with an adjusted gross income of less than $120,000 if married and filing jointly; and $60,000 if single, head of household, or qualifying widow(er).

2) Deductions:
Student loan interest deduction. For 2009, taxpayers can reduce their income subject to tax by up to $2,500 for payment of qualified student loan interest. This is reported as an “above-the-line” adjustment to gross income, so it is available even if you do not itemize deductions on Schedule A.

Tuition and fees deduction. This deduction can reduce the amount of a taxpayer's income that is subject to tax by up to $4,000. Generally the education credits outlined above will provide the greatest tax benefit; however, the tuition and fees deduction is available to taxpayers whose gross income exceeds the limitations for the Lifetime Learning Credit or those who do not qualify for the American Opportunity Credit.

Business deduction for work-related education. Employees who are able to itemize their deductions may be able to claim a deduction for the expenses paid for work-related education. This deduction is the amount by which qualifying work-related education expenses, plus other job and certain miscellaneous expenses, are greater than 2% of the employee's adjusted gross income.

3) Other educational tax planning items:
Contribute to a Coverdell education savings account (ESA). A Coverdell ESA is a savings account that is set up to pay the qualified education expenses of a designated beneficiary. The amounts deposited in the account grow tax-free and distributions are not taxable, as long as the distribution is not more than the beneficiary's adjusted qualified education expenses for the year.

Take early distribution from individual retirement arrangement (IRA). Generally, if a taxpayer takes a distribution from his or her IRA before reaching age 59 1/2, he or she must pay a 10% additional tax on the early distribution. However, taxpayers can take distributions from their IRAs for qualified higher education expenses without having to pay the 10% additional tax.

Receive tax-free educational benefits from your employer. Taxpayers can receive up to $5,250 of educational assistance benefits from their employers under an educational assistance program and not be required to include as income.