Higher Education Tax Benefits

There are several great, money-saving tax benefits out there available to taxpayers for tax years 2002-2006.¹ The IRS offers various tax savings to individuals and families paying for higher education. Tax deductions reduce the amount of income subject to tax before the tax is calculated. Tax credits reduce the amount of income tax after the tax is calculated.

Student Loan Interest Deduction

Borrowers paying interest on eligible student loans may deduct up to $2,500 of the interest paid. To be eligible, the loan must have been used to pay for a student's tuition and other higher education expenses.

Items that count include tuition, fees, room, board, books, supplies, equipment, and other expenses. The deduction applies to interest paid during the first 60 months that interest payments are required.

The Hope Scholarship Tax Credit

With this tax credit, you can receive up to $1,500 per eligible student for a taxpayer paying education-related expenses during a student's first two years of college. Eligible students must be enrolled at least half time in a degree or certificate program, have not completed the first 2 years of post-secondary education, and do not have any felony drug convictions. Qualified expenses include tuition and fees; excluded are room and board, books, supplies, transportation and other living expenses.

The student must be listed as a dependent on your return in order to claim the Hope Tax Credit. Since the Hope Credit is figured per student, a taxpayer with two dependents enrolled in the first or second year of college may claim a credit for each individual dependent student.

Lifetime Learning Tax Credit

You may also claim a Lifetime Learning credit of up to $2,000 after the first two years of post-secondary education if you pay for the education-related costs. Eligible students must be enrolled in at least one Post-secondary course, but do not need to be pursuing a degree. This tax credit is equal to 20% of the first $10,000 of qualified expenses paid. Tuition and related fees are included, but excluded are room, board, books, supplies and other living expenses. A student must be listed as a dependent on your return in order to claim the credit. Keep in mind that this credit is also figured on the basis of one credit per tax return, regardless of how many dependent students are involved.

Tuition & Fees Deduction

Another education expense benefit has been added for tax years 2002-2005. Beginning in 2002, you may be able to deduct the cost of higher education for yourself, your spouse or even a dependent, even if you do not itemize deductions on Schedule A, Form 1040.

When To Claim What!

Taxpayers may choose only one of the credits - either Hope or Lifelong Learning - for each dependent student every year. The Hope credit may be used for the first two years of college, for example, following by the Lifetime Learning credit in the years thereafter.

Education IRAs

Education IRAs (Individual Retirement Account) are trusts or accounts to help families save money to pay for a student's expenses. With this account, deposits are tax-free until you withdraw funds. In general, you may withdraw from an education IRA on a tax-free basis if the amount(s) does not exceed the expenses for the student. Expenses might include tuition, fees, books, supplies, and other equipment. If the student is enrolled at least a halftime, room and board costs may also be considered in these expenses.

Important! If you choose to take a tax-free distribution from an Education IRA, you may not claim the Hope Scholarship or Lifetime Learning credit.

Other Tax Benefits Available

There are additional ways that you may utilize the cost of higher education toward tax credits or other tax deductions, such as IRA Withdrawals and Employer-Provided Educational Assistance.

To learn more about the information outlined above, you should contact the IRS directly, or consult the IRS's Publication 970 on Tax Benefits for Education or your tax advisor. Contact the IRS at 800-829-3676 or visit online at www.irs.gov.

1. Tax information is provided as a general overview. Chase is not engaged in rendering legal, accounting, tax, or other professional advice services, and we are not qualified (nor is it our intent) to provide individual tax advice. To determine your eligibility and learn how these benefits apply to your specific situation, we encourage you to consult with your tax advisor and review IRS Publication 970, or call the IRS information line at 1-800-829-1040 for details.