Salvaging Tax Breaks for College Expenses

It costs a pretty penny to send a child to college, but you might be entitled to some tax relief when you file your 2009 return. Here is a summary of the key tax breaks for higher education currently on the books.  

Education tax credits: Depending on your situation, you may qualify for one of two special tax credits for higher education. However, the credits are phased out for high-income taxpayers.  

  • The Hope Scholarship credit has been enhanced for 2009 and renamed the “American Opportunity Tax Credit.” For starters, the maximum credit per student is increased from $1,800 to $2,500. Also, the credit is extended to all four years of study, not just the first two. The credit begins to phase out at a modified AGI of $160,000 for joint filers; $80,000 for single filers. 
  • The maximum Lifetime Learning Credit remains at $2,000 for 2009. Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit cannot be claimed on a per-student basis. This credit begins to phase out for 2009 at a modified AGI of $100,000 for joint filers; $50,000 for single filers. 

Tuition deduction: In lieu of an education credit, you may be able to deduct a portion of your child’s college tuition and other qualified fees. The maximum annual deduction is $4,000. A deduction of up to $2,000 is available to joint filers with an AGI that does not exceed $160,000; $80,000 for single filers. 

Coverdell Education Savings Accounts (ESAs): Distributions from a Coverdell ESA (once called the “Education IRA”) are tax-free if used for higher education expenses. But the maximum annual contribution has remained at only $2,000 for several years. For 2009, availability of a Coverdell ESA begins to phase out at a modified AGI of $190,000 for joint filers; $95,000 for single filers. 

Student loan interest: The tax law allows an annual deduction of up to $2,500 for interest paid on student loans. For 2009, this deduction begins to phase out at an AGI of $120,000 for joint filers; $60,000 for single filers. 

Section 529 plans: You can contribute generous amounts to a Section 529 plan with a child as the beneficiary. There is no current tax on the earnings within the plan. What’s more, distributions from Section 529 plans are exempt from income tax if the funds are used to pay for higher education expenses. 

Educational assistance plans: The first $5,250 of benefits paid by an employer through an educational assistance plan may be excluded from tax. This tax exclusion applies to graduate courses, as well as undergraduate studies. 

Make sure you coordinate these tax breaks with a professional adviser. Note that you cannot claim either higher education credit in a year in which you claim the tuition deduction.