Education Tax Breaks

There is no argument that one of the biggest expenses facing most of us is how to finance an education for our children. For the vast majority of us that fall somewhere between the super-wealthy and the poverty level, a major incentive that influences and determines our education investment choices are the tax breaks available for specific education investments and expenses. Let's explore the different options available and their interaction with each other, as well as with other investments and financial aid.

The most popular education specific investments available today share one common trait: They offer tax breaks when you use them to invest for education. You can't have a complete discussion of Coverdell Education Savings Accounts, state savings plans, or education savings bonds without including their tax break benefits. As a matter of fact, the tax savings are the biggest selling point of these education investments.

However, there is also a different category made up of tax deductions and credits that are not tied to investments, but are available for education expenses. You may be entitled to the following deductions and/or credits:

College expenses deduction. You can take a deduction for qualified education expenses up to $4,000. The deduction is phased out at higher income levels.

Student loan interest deduction. If you pay interest on a student loan, you may be eligible to take a tax deduction for up to $2,500 of the interest paid. The deduction is phased out at higher income levels.

American Opportunity credit. You may be eligible to claim the American Opportunity credit (formerly the Hope Scholarship tax credit) to offset qualified education expenses that you, your spouse, or a dependent incurred. The maximum credit is $2,500, consisting of 100 percent of the first $2,000 of qualified expenses incurred by the student, and 25 percent of the next $2,000.

Lifetime Learning credit. Of the various education tax breaks available, the Lifetime Learning credit is a tax credit available for an unlimited number of years in which a student takes one or more post-secondary educational courses. The maximum credit is $2,000 per family.

For more information on education tax breaks, consult IRS Publication 970, Tax Benefits For Education, available on the IRS website.