Student loan interest. Once you've graduated college and left behind the final exams and toga parties, it's time to start repaying college loan debt.
Fortunately, the government provides relief. Borrowers can reduce their tax burden by up to $2,500 for qualified educational expenses. As long as your modified adjusted gross income is under $55,000 ($110,000 for a joint return), you qualify for the full deduction.
If your MAGI is higher than those amounts, the deduction gradually phases out. You're out of luck and won't qualify for the deduction if your MAGI is $70,000 or more ($140,000 or more if you file a joint return).
You also must file a joint return if you're married, and you cannot claim the deduction if you're a dependent of someone else.
One of the key concerns of families is who gets to claim the deduction: the parent or the child? "In cases where parents and children are both paying for school with loans, the family needs to determine which taxpayer gets the tax benefit," says Kay Bell, a tax expert who writes Bankrate's "Eye on the IRS."
"The first thing to keep in mind is that the taxpayer who can claim this deduction must be personally liable for the loan. Essentially, if the loan is taken out by a parent to pay for a child's education, the interest on that loan may be deducted by the parent as long as the child was the parent's dependent when the loan was received. When a parent pays a loan taken out by the child but the parent is not legally liable, the child, not the parent, gets the deduction. If both the parent and the child obtain education loans and, for example, it's in the child's name but the parent is a cosigner on the loan, the determination of who gets the deduction depends on whether the child was a dependent."
You generally can continue to take this deduction for the life of the loan as long as you are making interest payments and remain within the income guidelines.
3. Tax credits for higher learningHope credit. The federal government provides two tax credits for students and parents to help offset the increasing costs of higher education. These credits reduce the amount of income tax you owe at the end of the year.
"You need to sit down if you have a kid in college and see who's going to benefit the most from taking that credit," says Kay Bell, a tax expert who writes Bankrate's "Eye on the IRS" blog. "They're different amounts and for different situations."
You can take a Hope credit of up to $1,650 for qualified educational expenses paid for you, your spouse or an eligible dependent for whom you claim an exemption on your tax return. However, a student with a felony drug conviction cannot take the credit.
You can claim the credit for tuition, books and certain student fees, but not for room and board. The maximum tax credit is $1,650 per eligible student.
The Hope credit is limited to the first two years of enrollment at an eligible educational institution. The student must be enrolled at least half-time in a program that leads to a degree, certificate or other recognized education credential. The credit can be used only twice for the same student.