Educational Expense Deductions and Credits

There are a number of tax incentives to assist taxpayers in offsetting the increasing costs of education. Below are general discussions of each incentive. Keep in mind that these incentives overlap and expenses may qualify under one or more incentives. As a result, a coordinated approach must be used to maximize the permitted tax benefits. Please contact us for more detailed information on any tax saving benefits.

Deduction of Education Supplies by Educators

An "eligible educator" may deduct from adjusted gross income (on page 1 of Form 1040) up to $250 of nonreimbursed education expenses incurred. An "eligible educator" includes a K through grade 12 teacher, instructor, counselor, principal or aide who works at least 900 hours during a school year at an elementary or secondary school. Qualifying expenses include those for books, supplies, computer equipment, computer software, and other supplementary materials used in the classroom.

Student Loan Interest Deduction

A deduction of up to $2,500 from adjusted gross income is available for interest paid on a student loan. Only the individual legally obligated to make the loan payment may claim the deduction. In addition, that person must not be claimed as a dependent on another's tax return. The deduction is phased out if AGI exceeds $145,000 (married) or $70,000 (single)

Lifetime Learning Credits

A credit of up to $2,000 is permitted (the credit is per year, not per student). The credit is equal to 20% of tuition and fees of the first $10,000 (not including room and board or books) paid during the year to an eligible institution for undergraduate, graduate or professional courses.  The Lifetime Learning Credit cannot be claimed in the same year as a Hope Scholarship Credit.

The credit is claimed by the taxpayer that claims the student as a dependent, not necessarily by the taxpayer that paid the expenses. The credit begins to phase out if AGI exceeds $116,000 (married) or $58,000 (single). If the credit cannot be utilized by the parent due to the income limits, it may be better for the parent not to claim the child as a dependent. This allows the child to claim the credit. The credit cannot be claimed on expenses paid with Education IRAs or Section 529 plan funds.

Hope Scholarship Credit

A credit of up to $1,800 for 2008 is permitted per student per year for tuition and fees incurred during the first two years of post-secondary education. The credit is equal to 100% of the first $1,200 of tuition and fees (not including room and board) and 50% of the next $1,200. The student must be enrolled at least on a half-time basis for at least one term.

The credit is claimed by the taxpayer that claims the student as a dependent, not necessarily by the taxpayer that paid the expenses. The credit begins to phase out if AGI exceeds $116,000 (married) or $58,000 (single). If the credit cannot be utilized by the parent due to the income limits, it may be better for the parent not to claim the child as a dependent. This allows the child to claim the credit. The credit cannot be claimed on expenses paid with Education IRAs or Section 529 plan funds.

Education IRAs

Taxpayers may contribute up to $2,000, annually, per beneficiary to an Education IRA. Such contribution is nondeductible, but any earnings on the account are tax-free if the account funds are used to pay qualified education expenses, including tuition and fees, books, supplies, equipment and uniforms (plus room and board in certain cases) at public and private schools grades K-12, college and post-graduate instruction. Earnings on non-qualified withdrawals are includible in income and are subject to a 10% penalty. The contribution is phased out if AGI exceeds $220,000 (married) or $110,000 (single).

Section 529 Plans

Contributions to a Section 529 plan are nondeductible, but any earnings on the account are tax-free if the account funds are used to pay qualified education expenses at the college and post-graduate levels. Qualified education expenses include tuition and fees, books, supplies, equipment and limited amounts of room and board. Earnings on non-qualified withdrawals are includible in income and are subject to a 10% penalty. Contributions to an Ohio-sponsored Section 529 plan are deductible on the Ohio income tax return up to $2,000 per beneficiary per year, with an unlimited carryforward to future years.

Contributions are considered gifts.  Any gift in excess of the annual exclusion limit ($12,000 in 2008) should be reported on a gift tax return.

Employer-Paid Education Expenses

The employer may exclude from an employee's wages up to $5,250 per calendar year of expenses the employer paid for post-secondary or graduate level courses. Any reimbursement in excess of this amount is considered to be taxable income to the employee. Note that this provision was recently extended to cover graduate level courses.