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College Expenses Can Cut Your Taxes If You Know And Follow The Rules

With college costs rising faster than inflation and financial aid shrinking, it is now more important to take full advantage of the income tax breaks that are allowed for families of college students. Whether it is a child or yourself, there are many different income tax strategies that can help defray some of the education costs by refunding income tax dollars.

There are several sources of education deductions and credits that you may be able to use to let the IRS help you pay for your college education. Here is a brief listing of the main choices and they are ranked from the most effective to the least effective based on potential savings.

1. American Opportunity Tax Credit: Credits are always the best savings because they reduce your actual income tax on a dollar for dollar basis. The American Opportunity credit allows for up to a $ 2,500 savings and allows up to $ 1,000 to be refundable even if you do not owe income tax.

2. Lifetime Learning Credit: The Lifetime Learning credit is next in line, and could actually allow you to receive more tax credits over a longer period of time. Just remember that you can only use one credit program per year for each student that you have in college.

3. Tuition and Fees Tax Deduction: This is not a credit, but a deduction from your taxable income for tuition and fees that you incur up to a maximum per year. A tax deduction will save you an amount that is equal to your deduction multiplied by your applicable income tax rate. As an example, if you have a $ 1,000 tuition deduction and are in a 28% tax bracket, you will save $ 280 in income taxes. If you cannot qualify for credits because of income limitations, you probably can use this deduction.

4. Student Loan Interest Deduction: With the average college graduate taking on $ 24,000 in student loans, loan interest can be a substantial expense. Now there is a direct way for students and graduates to take a student loan interest deduction without having to itemize their deductions. This direct deduction is similar to the tuition and fees deduction because it reduces taxable income and your savings are based on your income tax rate.

5. Work Related Education Expense Deduction: This deduction can be taken if you do not qualify for any of the others and meet certain IRS guidelines. If you are required to take continuing education or have elected to take some courses to help you advance your career in the same field, you may be able to deduct these expenses as part of your itemized deductions on Schedule A. They are reported under the miscellaneous deduction category and are subject to a two percent of Adjusted Gross income (AGI) offset before you get any actual savings.

Summary: It is growing more important for families and individuals today to take advantage of all the saving opportunities that are available for education. Unfortunately many do not. As the price of a college education continues to escalate, family finances can be severely stretched. Make sure that your tax adviser is aware of what you are paying for education and uses every possible strategy you can. Your wealth and retirement may depend on it.

To discover additional financial and income tax strategies, check out my blog or download your FREE Wealth Expansion Kit by clicking here . The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses.

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