- What are dividends and how are they taxed?
- What is the basis of property acquired by gift?
- What is the generation-skipping transfer tax?
- Is an early distribution from a retirement plan taxed?
- How is the gain or loss on the sale or transfer of a capital asset determined?
- What are the tax consequences of the sale of a principle residence?
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- Do I have to pay US income tax on money I earned in a foreign country?
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- Are any taxpayers exempt from paying property taxes?
Are there any Tax Breaks for Educational Expenses?
There are a number of tax measures designed to help parents, students and others who are paying or saving for higher education expenses. The Taxpayer Relief Act of 1997 (TRA) is a starting point for determining what tax relief is available. Among other things, the TRA added section 25A of the Internal Revenue Code, which provides for the Hope Scholarship Credit and Lifetime Learning Credit, and added section 221, which provides a deduction for student loan interest.
Hope Scholarship Credit and Lifetime Learning Credit
Both the Hope Scholarship Credit and Lifetime Learning Credit provide for nonrefundable credits for “qualified tuition and related expenses,” which means tuition and fees that are required for the enrollment or attendance of an eligible student at an eligible educational institution. Charges or fees associated with room and board, meals, transportation and similar personal and living expenses are not included in the definition of qualified tuition and related expenses. Both the Hope Scholarship Credit and the Lifetime Learning Credit are phased out (reduced) for taxpayers with certain adjusted gross incomes. For 2008, the phase out is for taxpayers with adjusted gross income of between $48,000 and $58,000 (single filers) and $96,000 and $106,000 (joint filers). If the taxpayer’s adjusted gross income is above $58,000 (single filers) or $106,000 (joint filers), the credits are not available. In addition, a taxpayer is not permitted to claim both a Hope Scholarship Credit and a Lifetime Learning Credit for the same student in the same taxable year.
The Hope Scholarship Credit permits a taxpayer to claim a nonrefundable credit of 100% of the first $1,000 and 50% of the next $1,000 of qualified tuition and related expenses paid for the first two years of a student’s postsecondary education in a degree or certificate program. These amounts are adjusted for inflation; for the 2008 tax year it is $1,200. Thus, for the 2008 tax year, the maximum Hope Scholarship Credit is $1,800 per eligible student. A student cannot claim the Hope Scholarship Credit on his or her own tax return if a parent or someone else claims the student as a dependent.
Taxpayers can claim a nonrefundable Lifetime Learning Credit of up to $2,000 per year per taxpayer for qualified tuition and related expenses paid on behalf of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent(s). This amount applies per taxpayer, regardless of the number of students, and it is not adjusted for inflation. Unlike the Hope Scholarship Credit, a taxpayer can claim the Lifetime Learning Credit for an unlimited number of years.
Deduction for Student Loan Interest
Under section 221 of the IRC, an individual taxpayer can deduct the interest paid on any qualified education loan, up to $2,500. This amount is reduced for taxpayers with certain adjusted gross income levels. For 2007, the amount of the student loan interest deduction is phased out if the taxpayer’s modified adjusted gross income is between $55,000 and $70,000 (single filer) or $110,000 and $140,000 (joint filer). If the taxpayer’s modified adjusted gross income exceeded $70,000 (single filer) or $140,000 (joint filer), he or she cannot take the deduction.
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