Tax Benefits

In addition to the financial aid (student loans and grants & scholarships) programs mentioned in my last two posts, there is an indirect way to reduce the college bill through federal tax reductions. There are four tax breaks for college students and recent graduates. As the April 15 deadline for filing your federal return is approaching, here is a quick review. Some benefits have income and other restrictions. More information can be found in IRS Publication 970, Tax Benefits for Higher Education.

1. Student Loan Interest
Current college students paying interest on unsubsidized loans and graduates who are repaying their loan can claim a tax deduction of up to $2500. There has been a ruling that interest paid on the parent PLUS loan also qualifies, but I recommend that you check with a tax expert before taking that deduction.

2. College Tuition
There are two programs, the Hope Scholarship Tax Credit and the Lifetime Learning Tax Credit. They are both tax credits, which means you subtract the amount for which you are eligible right off your tax bill. You do, however, have to pay taxes to qualify. Hope Scholarship Tax Credit.

For the 2007 tax year, a family may claim a Hope credit up to $1,650 for each eligible dependent for up to two years. The Hope credit is only available for a student's first two years of postsecondary education.

A student or family may claim a tax credit of up to $2,000 per year with the Lifetime credit. The amount of the Lifetime credit is 20 percent of the first $10,000 of qualified educational expenses paid for all eligible students. The Lifetime credit is available for all years of postsecondary education and for courses to improve job skills.

3. Tuition and Fees Tax Deduction
This is a deduction (not a credit) which can reduce taxable income by as much as $4,000 in 2007. This deduction may benefit students who do not qualify for either the Hope or Lifetime Learning tax credits.

4. Moving Expenses
Students who are required to move to take their first job qualify for a deduction for the cost of moving themselves and their possessions.