April 15th marks the dreaded date when those who file taxes have to submit their tax returns. For students, it doesn't have to be a time of stress. In order to help cut the looming cost of college, the government allows a couple of tax breaks for those still in school.
Tax Deductions for Student Loan Interest
If you're currently paying interest on unsubsidized loans or have graduated and are paying back your loans, you can claim a tax deduction on your federal student loan interest.
Students lucky enough to have parents paying for their loans can also cash in on the deduction.
In the past, no one could reap the tax benefits if parents repaid student loans for their child. Now, the IRS treats student interest payment as if it had been paid by the student borrower, even if Mom and Dad covered the cost. An independent student loan borrower can qualify to deduct up to $2,500 for student loan interest.
Earn an Education Tax Credit
Through the Hope Scholarship Tax Credit or the Lifetime Learning Tax Credit, you can deduct the total credit amount directly from the taxes owed, which makes these credits extremely valuable. However, you cannot get a refund for the credits if you do not pay taxes.
In 2009, a family may claim the Hope Scholarship Tax Credit up to $2,500 for each eligible dependent. However, the Hope credit is only available for a student's first two years of postsecondary education. The credit is based on the student's or family's income.
A student or their family may claim a tax credit of up to $2,000 per tax year with the Lifetime Learning Tax Credit. The amount of the Lifetime Learning tax credit is 20%of the first $10,000 of qualified educational expenses paid for all eligible students. The Lifetime Learning credit is available for all years of postsecondary education, unlike the Hope credit, which is only available for the first two years.
Important Note: You or your parents can get the Lifetime Learning tax credit, but you cannot both receive it in the same year. No double-dipping, sorry.
Students may also want to consider the Tuition and Fees Tax Deduction, which can reduce taxable income by as much as $4,000. Unlike tax credits, this is a deduction that lowers the amount of taxable income attributed to the student or family. This deduction may benefit students who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.
Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible university. Personal living and family expenses, including room and board, medical insurance and transportation, are not deductible expenses.
State-Sponsored College Savings Plans
State-sponsored college savings plans, often called Section 529 Plans, are a great deal since the withdrawals to pay your qualified college costs are tax-free.