While there have always been tax savings available when paying for an education, the Taxpayer Relief Act of 1997 greatly increased both the types available and their complexity. New types of tax programs to assist those with educational expenses include:
* The HOPE Tax Credit
* Lifetime Learning Tax Credits
* Educational Savings Programs, which are 1. State Qualified Tuition Programs and 2. the use of an Educational IRA
* Use of Funds from a Retirement IRA
* Deduction of Interest on Educational Loan Interest
In addition to these, programs already available when paying educational expenses included:
* Employer Educational Assistance (extended for three years)
* Educational Business Expense Deduction for
1. the Self Employed, and for
* Series EE Savings Bonds
Most of the tax savings come with requirements your client must meet before receiving the tax benefit, limitations on what educational expenses are covered, and either reductions or phase-outs of the amounts deductible or of the tax credits.
These restrictions will be discussed for all of the educational tax savings programs available. This article will also discuss how to choose which program(s) to use.
Restrictions & Qualifications Common to Most of the Programs
Most of the educational tax savings programs are mutually exclusive, and so the best program should be chosen. While tuition and fees qualify as educational expenses for all the programs, other costs only qualify in certain programs.
Funds used for education must be reduced by the amount of funds that are received tax free, such as scholarships and veterans benefits before any deductions or credits are allowed. If a deduction is allowed, a credit or another deduction for using the same funds isn't allowed as well.
For the funds to qualify, they must be paid to qualified educational institutions. These institutions are generally those eligible to participate in …