Tax Benefits for Education

What education tax incentives are available?

The following benefits are available to individual taxpayers for education expenses:

Education Credits
The Hope Scholarship Credit and the Lifetime Learning Credit help offset the cost of post-secondary education for you, your spouse or a dependent. For tax years 2009 and 2010, the Hope Scholarship Credit is renamed the American Opportunity Tax Credit and the amount of the credit has been increased. However, you cannot claim both the American Opportunity Tax Credit and Lifetime Learning credits for the same student in the same year. Both credit amounts are determined based on your modified adjusted gross income and your filing status. If your modified adjusted gross income exceeds certain limits, both credits are either reduced or eliminated. Furthermore, you cannot claim either credit if you are married filing a separate return or claimed as a dependent on someone else’s return.

For tax years 2009 and 2010, the American Opportunity Tax Credit allows you to claim up to $2,500 of tuition and related expenses, including course materials, per eligible student per year. The credit applies for the first four years of post-secondary education, such as college or vocational school. If the amount of the American Opportunity Tax Credit for which you are eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you are eligible.

The Lifetime Learning Credit equals 20% of the first $10,000 of tuition and related expenses paid during the year, for a maximum credit of $2,000 per tax return. The credit applies regardless of the number of years the student is in the program.

Special rules for the credits apply to students attending college in a Midwestern disaster area. Visit www.irs.gov, for additional information.

Tuition and Fees Deduction
You may be eligible to deduct up to $4,000 of the tuition and fees that you pay by December 31, 2009, for the enrollment of yourself, your spouse, or dependent, at an eligible educational institution. You do not have to itemize to claim this deduction. The deduction is reduced or eliminated if your modified adjusted gross income exceeds certain limits, based on your filing status.

You cannot claim the tuition and fees deduction if you are married and do not file a joint return, if someone claims you as a dependent on his or her return, or if you claim the Hope Scholarship Credit (or increased American Opportunity Tax Credit) or Lifetime Learning Credit. In addition, you cannot deduct expenses paid with a tax-free education benefit, such as a scholarship or employer-provided education assistance.

Education as a Business Expense 
You may be able to deduct educational expenses paid during the year as business expenses if they are for education that:

1. Maintains or improves skills required in your present job; or
2. Serves a business purpose of your employer and is required by your employer or by law, to keep your present salary, status, or job.

Your expenses are not deductible if the education:

1. Is required to meet the minimum educational requirements of your job, or 
2. Is part of a program of study qualifying you in a new trade or business.

Employee business expenses are deducted as miscellaneous itemized deductions on Form 1040 Schedule A. Self-employed individuals deduct educational expenses related to their business on Schedules C, C-EZ or F on Form 1040.

Deductible expenses can include tuition, fees, books, supplies, and certain transportation costs, and can be claimed in combination with an education credit or the tuition and fees deduction. However, an expense that is used to calculate an education credit or claimed under the tuition and fees provision cannot be deducted as a business expense. You cannot deduct an expense paid with a tax-free education benefit, such as a scholarship or employer-provided education assistance.

Coverdell Education Savings Accounts and Qualified Tuition Programs
Certain education benefits provided by your employer may not have to be included in income if the benefits are part of an educational assistance program. You may also contribute money to an account established for paying a student’s qualified education expenses at an eligible educational institution. Coverdell Education Savings Accounts (ESAs) and Qualified Tuition Programs (also known as “529 plans” or “QTP”) allow you to grow the money in the accounts tax-free and the distributions are tax-free if used to pay qualified education expenses.

Contributions to ESAs:

1. are limited to $2,000 per year per student;
2. must generally be made before the student reaches age 18; and
3. are only available if your modified adjusted gross income does not exceed certain limits, based on your filing status. ESAs are available to pay tuition or related expenses for primary, secondary and post-secondary schools.

The requirements for QTP are generally less restrictive than ESAs. The qualified education expenses are generally limited to tuition or related expenses paid in connection with enrollment at an institution of higher education. For 2009 and 2010, however, the list was expanded to include computer technology and equipment or internet access and related services used by the student enrolled at an eligible educational institution.

What IRS Publications and Forms are available as a resource?

• Publication 970, Tax Benefits for Education
• Form 8863, Education Credits
• Form 2106, Employee Business Expenses

Whom should I contact if I need assistance?

If you have questions, concerns, or need information about education tax incentives, you can contact the IRS in the following ways:

• For more information on education credits, visit the IRS website at http://www.irs.gov/newsroom/article/0,,id=107670,00.html.
• For more information on Coverdell Education Savings Accounts, visit the IRS website at http://www.irs.gov/taxtopics/tc310.html.
• For more information on Qualified Tuition Programs, visit the IRS website at http://www.irs.gov/taxtopics/tc313.html.
• For more information on work-related education expenses, visit the IRS website at http://www.irs.gov/taxtopics/tc513.html.
• For additional help with education tax incentives, call 1-800-829-1040.