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Tax Breaks for Education

 

Your Initial Financial Plan:

 


Looking For a CPA, Lawyer or Financial Advisor who has worked with lots of other newlyweds and is familiar with the issues that affect you?  

Everyone's heard the success stories about people who ran some of the country's most successful businesses, even though they never graduated from college.  Those stories represent the exception, not the rule.  In today's competitive job market, you won't even get an interview at most companies unless you have an undergraduate degree.  And when it comes to advancement, one way to move to the front of the line is to have a graduate degree under your belt.  To help even the playing field, the federal government offers various tax incentives for people enrolled in undergraduate or graduate level courses.

Two New Education Tax Credits

Back in 1998, two education tax credits came into existence - the Hope Credit and the Lifetime Learning Credit.  What makes tax credits so desirable is they provide a dollar for dollar reduction in your tax liability.  In other words, a $100 tax credit will increase your federal income tax refund by $100.

If you qualify for the Hope credit, you'll cut your tax bill by as much as $1,500.  The Hope credit applies to the first two years of post secondary school education for you or your dependents and is equal to 100 percent of the first $1,000, and 50 percent of the next $1,000, paid for tuition, fees, books and supplies.  To qualify for this credit, you (or your dependent) must be enrolled in a degree or certificate program on at least a half-time basis.

The Lifetime Learning Credit is much broader and could save you up to $1,000 in federal income taxes.  This credit, which equals 20 percent of the first $5,000 of tuition and fees paid during the year, applies to courses offered at accredited colleges, universities or other institutions, whether or not you're enrolled in a degree program.

The downside to both these credits is that only low and moderate income taxpayers are eligible.  If you're single, these credits will be partially disallowed once your adjusted gross income (AGI) exceeds $40,000 and completely disallowed once your AGI exceeds $50,000.  If you're married, $80,000 of AGI is where the phase-out begins, and at $100,000, these credits are completely disallowed

Employer Provided Education Assistance

Many companies take advantage of a tax break that allows them to pay up to $5,250 towards their employees' educations.  Before signing up for any classes, contact your company's benefits department to find out if your employer offers this great opportunity.

A New Tax Break for 2002 - 2005

In 2002 and 2003, you're allowed to deduct qualified higher education expenses in arriving at your AGI.  The maximum deduction is $3,000 per year and is permitted only if your AGI doesn't exceed $65,000 if you're single or $130,000 if you're married.  This deduction increases to a maximum of $4,000 for 2004 and 2005, and is set to expire after 2005.

Deducting the Cost of Your Education

Even if you don't qualify for the Hope credit or the lifetime learning credit, and your employer doesn't offer any education assistance, there's still hope for you within the tax code.  As long as the courses you're taking improve your skills in your current profession and don't qualify you for a new trade or business, they might be deductible as an unreimbursed employee business expense.  Take a look at the instructions to the IRS Form 2106, Employee Business Expenses, to see if you qualify to deduct the cost of your education.


Interest Rates Keep Getting Cut by the Fed

If you have student loans, are you taking advantage of these reduced rates?  Lower rates will help you cut down on the time it takes you to get out of debt by minimizing the interest you pay each month.  Remember, the lower the interest rate, the larger the portion of your monthly payment that will get applied against your outstanding balances.

  • If you still owe student loans, see how much you'll save by consolidating your loans into one loan with a lower interest rate at FinancialAid.com.

 

 

 

 

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