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Plan Well, Retire Well

Saving and investing your money

Save on taxes when paying for education


There are currently eight tax breaks that can help you reduce the cost of college or other post-secondary education. Whether you're saving for college for your kids, paying for classes you're taking right now, or making payments on student loans, there may be a tax break for you:

Saving for future expenses

  • Coverdell Education Savings Account
  • Qualified Tuition Programs (529 Plans)
  • Savings Bond Interest Deduction

Paying for current expenses

  • American Opportunity (Hope) Credit
  • Lifetime Learning Credit
  • Employee Assistance Plans
  • IRA Withdrawals

Making payments on student loans

  • Student Loan Interest Deduction

The Higher Education Expenses Deduction expired at the end of 2011. However, it has been extended several times in the past and there's always a chance that could happen again before the end of 2012.

Here are some facts you may not know about these tax breaks:

If your income is too high, you won't be eligible for most education tax breaks. And the limit varies from one tax break to another. A single person with a Modified Adjusted Gross Income (AGI) above $60,000 will begin to lose some of his student loan interest deduction, and it will phase out entirely when the income reaches $75,000. The numbers for a married couple filing jointly are $125,000 and $155,000 for 2012.

Yes, there is a deduction for savings bond interest that is used to pay for post-secondary classes. But the bond owner must be at least age 24 when the bond is purchased, and be either the sole owner of the bond or own it jointly with a spouse. Most people buy bonds in the name of the child, making the interest on that bond ineligible for the deduction.

You don't have to be working toward a degree to get a tax benefit. The Lifetime Learning Credit is can be used even if you already have a degree. Taking a single class to acquire or improve job skills qualifies; so classes for a graduate degree or a recognized credential. That's why it's called the Lifetime Learning Credit.

Married couples must file jointly in order to claim the American Opportunity Credit, the Lifetime Learning Credit, the Student Loan Interest Deduction, or the Savings Bond Interest Deduction.

If you're under age 59 ½ and you take distributions from an IRA that you use for graduate or undergraduate classes, you can avoid the 10% early distribution penalty – but not the income tax.

Not all of your expenses are eligible. Tuition and fees are qualifying expenses for all of the tax breaks. But the cost of your textbooks won't count for the Savings Bond Interest Deduction or the Lifetime Learning Credit.

To get more details, see my fact sheet on Tax Breaks for Higher Education and IRS Publication 970, Tax Benefits for Education.



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