Tax Breaks for Higher Education - University of Illinois Extension

• Introduction
• Highlights of Tax Breaks
• Benefits, Requirements and Limitations of Specific Tax Breaks
• Explanation of Terms
• Claiming and Combining Tax Breaks
• Ways to Make the Most of Tax Breaks
• Suggested Resources
• Credits

Claiming and Combining Tax Breaks

Each tax break has rules governing how and if it can be used in combination with other tax breaks. Before committing to using a particular tax break, compare to see if claiming it will limit your ability to another tax break that is more beneficial.

The following are general guidelines. Some of these rules may change when the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 expire at the end of 2010. For more details, please refer to the appropriate IRS form or publication for the year in which you are claiming the tax break. A list is provided below.

If you are saving for higher education expenses:

1. You can contribute to both an Education Savings Account and a Qualified Tuition Program for the same student in the same year, at least until 2010. See Tips, below, for more information.
2. Distributions from an Educational Savings Account are tax-free if contributed to a Qualified Tuition Program.
3. Interest on savings bonds is tax-free if the proceeds are contributed to either an Education Savings Account or a Qualified Tuition Program.

If you are paying for higher education expenses:

1. You cannot claim the Hope Scholarship and the Lifetime Learning Credit for the same student. You can claim them both if the expenses are for different students.
2. Expenses paid with following types of tax-free educational assistance cannot be used to claim any deduction or credit listed under numbers 3 or 4, below:
1. The tax-free portion of scholarships and fellowships
2. Veteran’s education benefits
3. Pell grants (see Pell Grants note below)
4. Employee Assistance Plans
5. “Any other non-taxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.” (IRS Publication 970)
3. After subtracting any expenses covered by the types of tax-free educational assistance listed above, apply the remaining expenses to the following tax breaks in the order shown. The same expenses cannot be used to claim more than one of these benefits:
1. Hope Scholarship or Lifetime Learning Credits.
2. Distributions from Education Savings Accounts and Qualified Tuition Programs. If you take distributions from both, you must allocate expenses between the two.
3. Savings bond interest deduction.
4. Calculate qualified expenses for additional tax breaks as follows. First, subtract expenses covered by tax-free educational assistance listed under 2, above . Then:
1. Student loan interest deduction: Subtract 1) non-taxable earnings from Education Savings Accounts,  2) non-taxable earnings from Qualified Tuition Programs, and 3) the savings bond interest deduction.
2. Withdrawals from IRAs that avoid the 10% early distribution penalty: Subtract distributions from Education Savings Accounts.
   

The following IRS worksheets, forms, and guidelines for calculating tax breaks can be found on the IRS web site at www.irs.gov.

Note: Pell grants are not listed as an adjustment for the student loan interest deduction or for the savings bond interest deduction, so you may not have to subtract expenses covered by a Pell grant when calculating those two tax benefits.