by henigan

Created on: October 18, 2008   Last Updated: October 21, 2008

College education costs could be returned used as a deduction or credit when you filed your income tax return. It is important that you know how to figure out the deductions and credits in order to file the most advantageous return. Some benefits are based on modified adjusted gross income and some are based on adjusted gross income. To figure out whether you will benefit more from taking a deduction or a credit, you need to understand the difference. The adjusted gross income is the amount on the last line of page one of the 1040. It is the number carried over to the top of the second page. The modified adjusted gross income is the amount you have if you stop at the line before you deduct your IRA contribution. The IRS refers to these numbers as the AGI and the MAGI.

In all instances, deductions and credits can be used for yourself, your spouse or anyone you can claim as a dependent.

From 2002 until 2007, some college expenses could be deducted directly on form 1040. While this benefit was supposed to terminate in 2007, an act of Congress may extend it for another year. The tuition and fees deduction is based on your MAGI. In 2007, the maximum value was $4,000 for someone whose MAGI is less than $65,000 ($130,000 if married filing jointly.) The maximum decreases to $2,000 for those whose MAGI is less than $80,000 ($160,000 if married filing jointly.) If this deduction is continued, these amounts are likely to stay the same. This deduction can only be taken for the amount required to be paid to the college in order to be enrolled in the course. For instance, this may include lab fees, but not books. There are times that education expenses can be deducted as a business expense. If you are in a program which relates to your current job, fees can be deducted on Schedule A. The total amount of business expenses must be over 2% of your AGI. The above deductions reduce your taxable income. This is different from the education credits.

There are two different education credits which reduce your tax liability. The Hope Credit is for first and second year college students and may only be taken twice for each person. The Hope Credit will reduce your tax bill by up to 75% of the first $2200 of expenses paid. The actual maximum amount is $1650. The Lifetime Learning Credit will reduce your tax bill by up to 20% of the first $10,000 of expenses paid. It can be claimed by anyone at anytime that they are enrolled in an accredited institution. Both of these credits are available to those whose MAGI is below $57,000 ($114,000 if married filing jointly.) The credits are not available to those who are married filing separately. Also, education credits are the third credit that may be used to reduce your tax liability. If you are eligilbe for the child care credity or credit for the care of the elderly or disabled and the tuition and fees deduction is still available, you should figure out which of the benefits works best for your situation.

This is a good time to remember that withdrawals from IRA's are not subject to the 10% early penalty tax if they pay for a college education.

Those who are paying for school with 529 (TAP) accounts or Coverdell Education Savings Funds should seek advice from an accountant.

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