The cost of a college education could quickly empty out your pockets. It’s probably the most expensive purchase you’ll make besides a home. Who wouldn’t want a break on tuition? The good news is you can lighten your financial load by taking advantage of tax incentives that are available to you. The April 2012 tax deadline is several months away, but you can start trackingÂ educational expenses that might be eligible for a tax break. Here are some tax deductions, credits, and savings plans that will help loosen the chokehold on your wallet.
American Opportunity Credit. Tax credits are beneficial because they reduce the amount of income tax you might have to pay. The American Opportunity Credit adds required course materials to the list of qualifying expenses and allows taxpayers to claim the credit for four years of college instead of two. The maximum annual credit of $2,500 per student is available to individuals whose modified adjusted gross income is $80,000 or less or $160,000 or less for married couples filing a joint return.
Business Deduction for Work-related Education. Deductions reduce the amount of your income that is subject to tax, which can reduce the amount of tax you might have to pay. If you’re self-employed and you itemize your deductions, you might be able to claim a deduction for money used to pay for education related to your job. According to the Internal Revenue Service, the deduction will be the amount by which your qualifying work-related expenses in addition to any other job expenses is more than 2% of your adjusted gross income. If you are self-employed, you can subtract your expenses for qualifying work-related expenses from your income. Consequently, this can lower the amount of your income subject to both income tax and self-employment tax.
Scholarships and Fellowships. Whether the amount is tax free or taxable depends on the expense paid with the scholarship or fellowship and whether you’re a candidate for a degree. A scholarship or fellowship is tax free if you’re using it to pay qualified educational expenses and if you’re a degree candidate. Qualified educational expenses include tuition and fees and course-related expenses such as books, supplies, and required equipment. Non-qualified expenses include the cost of room and board, travel, research, clerical help, and equipment or other expenses that aren’t required for courses.
Expansion of 529 Plans. These plans come with a tax-free withdrawal of earnings that build up in the plan based on the contribution made. Tax-free college savings plans and prepaid tuition plans can also be used to purchase computer equipment used for school.
For additional information and a detailed list of restrictions,Â go to the IRS website andÂ check outÂ the Tax Benefits for Education Information Center.