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Education Credits and Deductions

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Coverdell ESA

The annual contribution to a Coverdell Education Savings Accounts is set at $2,000 per beneficiary and the final date on which the contributions can be made is extended to April 15 of the following year. There is no immediate tax benefit for making a contribution, but Coverdell ESA monies can be used, tax-free, for qualified education expenses including tuition, fees, books, supplies, equipment and some room and board expenses.

Coverdell ESAs can be used for certain elementary, secondary, parochial and private school expenses. Contributions can be made until the beneficiary turns 18. Amounts remaining in the account when the beneficiary turns 30 must be withdrawn (with tax consequences) or rolled over for the benefit of another family member. Contributors must meet an income test for their contributions to be eligible for Coverdell tax benefits.

Qualified Tuition Program (QTP)/529 Plans

Also known as the 529 Plan, QTPs are another form of saving for future higher education expenses. Some plans allow the plan owner to lock in "tomorrow’s tuition at today’s price".  529 plans are offered both by states and private firms, and allow for a monetarily significant account balance. Oregon permits a tax credit for participants in the State’s plan. There are no income tests associated with 529 plans as there are with Coverdells. Because of the wide variety of investment opportunities available, it is important to get all the details and compare several types of plans.  Contact Bill at 503-656-0699 for more information about Oregon-endorsed 529 Plans.

IRA Withdrawals for Education Purposes

Withdrawals from a traditional or Roth IRA for qualified higher education expenses are exempt from the 10% early withdrawal penalty. Income tax may be assessed on the amount withdrawn.

Student Loan Interest Deduction

An "above-the-line" deduction in calculating adjusted gross income, all student loan interest paid during the tax year can be used to calculate the deduction. The maximum deduction is limited to $2,500 per taxpayer.  There is an income test to be met and the person who's name is on the loan is the only one who can claim this deduction.  If a parent has co-signed for the loan, the parent may take the deduction only if the he/she is also claiming the dependency deduction.  If the loan is only in the child's name and the parents are claiming the dependency deduction, then no one can deduct the student loan interest.

American Opportunity and Lifetime Learning Credits

Expenses paid by scholarships, grants, Coverdell or QTP monies cannot be used to calculate the American Opportunity or Lifetime Learning Credits but loan proceeds used to pay the eligible expenses do count. Both credits are limited by the taxpayer's income. To take either credit, the taxpayer cannot be claimed as someone else’s dependent.

The American Opportunity Credit is available for students in their first four academic years of post-secondary education. The student must be enrolled at least halftime, be pursuing a degree or credential and must not have had a felony conviction for the possession or sale of illegal substances. The credit is worth a maximum of $2,500. If the taxpayer chooses to use The American Opportunity Credit, it must be used for all eligible students on the tax return.  Qualified expenses include tuition, fee and course materials/equipment required for enrollment. 

The Lifetime Learning Credit is available for all subsequent years of post-secondary education. The credit is limited to a maximum of $2,000 per tax return (not student). The student may take any class-load and does not need to be pursuing a degree or credential. Qualified expenses are tuition and fees required for enrollment.  Books, equipment and supplies count ONLY if they must be paid to the school as a condition of enrollment.

Employer Education Benefits

Does your employer pay for higher education costs? Up to $5,250 of the benefit is excludable from your income. Only under- and post-graduate courses are eligible.   If the course of study is not job-related, the tuition reimbursement arrangements must be in writing.