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Student Loan Interest Deductions & Education-Related Tax Benefits

Tax benefits for education-related expenses

Many people are unaware that the federal government offers tax benefits for education-related expenses. Significant tax benefits may apply to taxpayers who are repaying student loans or currently paying for post-secondary education. Therefore, it is important to keep organized records to take advantage of these tax benefits.

Education-related tax benefits include:

  • American Opportunity Credit
  • Hope Credit
  • Lifetime Learning Credit
  • Student Loan Interest Deduction
  • Tuition and Fees Deduction

American Opportunity Credit

The American opportunity credit, which expanded the existing Hope credit, can be claimed for tuition and certain fees you paid for higher education in 2009. The American opportunity credit can be claimed for expenses incurred during the first four years of post-secondary education. The definition of qualifying expenses has been expanded for purposes of this credit to include course materials. This credit may be claimed for qualified education expenses for each student in the taxpayer's family, which includes the taxpayer, a spouse, or any eligible dependents. The 2009 credit is allowed for expenses paid for an academic period beginning in 2009 or the first three months of 2010.

  • The maximum amount of the credit is $2,500 per eligible student and the credit is partially refundable. Taxpayers may claim a tax credit based on 100% of the first $2,000 of qualified education expenses paid during the taxable year, plus 25% of the next $2,000 of qualified education expenses paid during the taxable year for each eligible student.

Restrictions for the American Opportunity Credit:

Individuals may not claim the credit if their filing status is married filing separately or if someone else can claim them as a dependent. The amount of the American opportunity credit is phased out for taxpayers whose modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). No credit is allowed for taxpayers whose MAGI is $90,000 or more ($180,000 or more if you file a joint return). A taxpayer may not claim the credit if they are claiming the lifetime learning credit or taking a tuition and fees deduction for the same student in 2009 or if they are taking the Hope credit for any student on the same return in 2009.

Hope Credit

The new American opportunity credit has replaced the Hope credit for most taxpayers. However, a larger Hope credit ($3,600 maximum) is available for students meeting the special rules for the Midwestern disaster areas. In order to claim the Hope credit for 2009, you must have at least one student attending an eligible institution in a Midwestern disaster area and choose not to claim the American opportunity credit for any student in 2009. This credit may be claimed for qualified education expenses for each student in the taxpayer's family, which includes the taxpayer, a spouse, or any eligible dependents. The student must be enrolled at least half-time in one of the first two years of qualifying post-secondary education, in a degree, certificate or other recognized credentialing program.

  • Taxpayers may claim a 100% credit per eligible student for the first $1,200 ($2,400 if a student in a Midwestern disaster area) of qualified education expenses and a 50% credit for the second $1,200 ($2,400 if a student in a Midwestern disaster area) of education expenses paid, resulting in an annual maximum credit of $1,800 ($3,600 if a student in a Midwestern disaster area). *

Restrictions for the Hope Credit:

Individuals may not claim the credit if their filing status is married filing separately or if someone else can claim them as a dependent. The amount of the Hope credit is phased out for taxpayers whose MAGI is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). No credit is allowed for taxpayers whose MAGI is $60,000 or more ($120,000 or more if you file a joint return). A taxpayer may not claim the credit if they are claiming the lifetime learning credit or taking a tuition and fees deduction for the same student in 2009 or if they are taking the American opportunity credit for any student on the same return in 2009.

Lifetime Learning Credit

The lifetime learning credit, available to students or their families, is for undergraduate, graduate, or professional study. The credit may be claimed for qualified education expenses paid for students in the taxpayer's family, which includes the taxpayer, a spouse or any eligible dependents, who are enrolled in one or more courses at an eligible educational institution.

  • The amount of the lifetime learning credit is 20% (40% if a student in a Midwestern disaster area) of the first $10,000 of qualified education expenses paid for all eligible students, resulting in a maximum credit of $2,000 ($4,000 for students in Midwestern disaster areas) for 2009*.

Restrictions for the Lifetime Learning Credit:

Individuals may not claim the credit if their filing status is married filing separately or if someone else can claim them as a dependent. The amount of your lifetime learning credit is phased out if your MAGI is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). No credit is allowed if your MAGI is $60,000 or more ($120,000 or more if you file a joint return). You cannot claim the lifetime learning credit for any student for whom you are claiming the American opportunity credit, Hope credit, or a tuition and fees deduction for in the same tax year.

Student loan interest deduction

The student loan interest deduction can reduce the amount of your taxable income by up to $2,500. Taken as an adjustment to income, you can claim a deduction on interest payments paid on qualified student loans even if you do not itemize deductions on Schedule A (Form 1040). The loan must have been borrowed while the student was enrolled at least half-time in a program leading to a degree, certificate or other recognized educational credential.

When calculating your deduction, remember to include the following as education loan interest:

  • Loan origination fees (usually a percentage of the amount borrowed).
  • Capitalized interest (the unpaid interest on a student loan that is added to the loan's outstanding principal balance).
  • Interest on revolving lines of credit (provided the line of credit is used only to pay for qualified education expenses).
  • Interest on refinanced student loans (both consolidated and collapsed loans).

Generally, you can claim this deduction if all four of the following requirements are met:

  • Your filing status is any filing status other than married filing separately.
  • No one else is claiming an exemption for you on his or her tax return.
  • You paid interest on a qualified student loan.
  • You are legally obligated to pay interest on a qualified student loan.

Income restrictions for student loan interest deduction:

In 2009, the amount of your student loan interest deduction is phased out if your MAGI is between $60,000 and $75,000 ($120,000 and $150,000 if you file a joint return). No deduction is allowed if your MAGI is $75,000 or more ($150,000 or more if you file a joint return).

Tuition and fees deduction

A taxpayer may deduct qualified education expenses paid during the year. The tuition and fees deduction can reduce the amount of taxable income by up to $4,000. Taken as an adjustment to income, this deduction can be claimed even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if you do not qualify for the American opportunity, Hope or lifetime learning credits.

Generally, you can claim this deduction if all of the following requirements are met:

  • Your filing status is any filing status other than married filing separately.
  • You pay qualified education expenses of higher education for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
  • Another person cannot claim an exemption for you as a dependent on his or her tax return.
  • No American opportunity, Hope or Lifetime Learning Credit has been claimed in 2009 with respect to expenses of the student for whom the qualified education expenses were paid.

Income restrictions for tuition and fees deduction:

In 2009, the maximum deduction amount of qualified education expenses is $4,000 for taxpayers with a MAGI of $65,000 or less ($130,000 or less if you file a joint return). If your MAGI is greater than $65,000 but not more than $80,000 (greater than $130,000 but not more than $160,000 if you file a joint return) your maximum tuition and fees deduction will be $2,000. No tuition and fees deduction will be allowed if your MAGI is more than $80,000 ($160,000 if you file a joint return).

Learn more about student loan interest deductions & education-related tax benefits

For more information on student loan interest deductions, such as how to correctly deduct student loan interest on your taxes contact a tax professional or visit the IRS website, www.irs.gov.

* The Midwestern disaster area is defined as areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. Visit the IRS website for more information—http://www.irs.gov/publications/p970/ch06.html.

This content is intended to provide general information on higher education tax benefits. It is not to be used as tax advice and should not be relied upon in the preparation of a tax return. IRS rules and policy nuances may be complex in some areas. Taxpayers should consult with a competent tax advisor or the IRS to determine how their own circumstances are affected. Charter One is a brand name of RBS Charter One, N.A. and Charter One of Pennsylvania.

 

 
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