Tax time approaches, and three unheralded federal program can save you big bucks
There's not much money to spare for college students. There's tuition to pay, books to buy, and those funny little "student association" and "technology" fees that really add up. In the end, most students have just about enough money to buy their packs of ramen and a jar of peanut butter to get through the week.
The approaching tax season can be especially daunting for students. For schoolgoers not expecting a refund, the added burden of having to pay taxes can drive them nuts. Yet, there is help in the form of federal tax breaks that can help ease the fear of the impending April 15 deadline.
The problem is that not all students know about the breaks. "I really don't know much about taxes other than you have to pay them," Minneapolis Community and Technical College sophomore Gwen McNamara said. "Student costs can be tax deductible? I really didn't know about that."
Murphy Cannon, financial aid supervisor at Minneapolis Community and Technical College, 1501 Hennepin Ave. S., said, "I haven't had anyone in the past year that I can remember asking about it. But programs like those are definitely a good thing."
According to the H&R Block Tax Office in Laurel Village, 13th Street and Hennepin Avenue South, schools are required to notify students of programs such as these.
The three main ones enacted under the Taxpayer Relief Act of 1997 to help students are the Hope Scholarship, The Lifetime Learning Tax Credit and the Student Loan Interest Deduction.
The Hope Scholarship
The Hope Scholarship is not actually a scholarship -- it is a tax credit that is subtracted directly from the tax a student owes (rather than reducing the student's taxable income).
It provides a tax credit for all of the first $1,000 and 50 percent of the second $1,000 of tuition expenses for students enrolled at least half-time in the first or second year of their college education in a program that leads to a certificate. Tuition expenses means solely the tuition and fees that must be paid at the time of enrollment.
Single students paying their own way and not claimed as a dependent can get the credit if their adjusted gross income does not exceed $50,000 (and the credit phases out for incomes between $40,000 and $50,000).
Married taxpayers have a ceiling of $100,000 for adjusted gross income, with the phase-out for incomes between $80,000 and $100,000. Married taxpayers must also file a joint return to claim the credit.
Parents can claim the credit for their qualifying children as long as they still claim the student as a dependent.
H&R Block says that most parents with qualifying children quickly claim the credit.
The Lifetime Learning Tax Credit
A student paying the previously mentioned qualifying tuition to a postsecondary institution can claim this credit. Surprisingly, this is the credit that often goes mostly overlooked by older students who don't think about it for their continuing education needs according to H&R Block and Minneapolis Community and Technical College.
The Lifetime Learning Tax Credit is also deducted directly from the actual taxes you owe. It provides a tax credit for 20 percent of the first $5,000 of qualified tuition and expenses.
Even though the Hope Scholarship and the Lifetime Learning Tax Credit are similar, the Lifetime Credit is available to students at anytime, not just in their first or second year of college. It's also not contingent on credit load -- students taking even one class can get it.
However, a student cannot claim both the Hope Scholarship Credit and the Lifetime Learning Credit at the same time. If a parent is paying taxes for multiple dependents who are college students, they can claim one credit for one student and a different credit for the other.
An example provided by www.alllaw.com states: "A taxpayer has two children she claims as dependents. Both go to the same college and have qualified tuition and expenses of $3,500 each, but one is a freshman and one is a junior. The taxpayer can claim the Hope Scholarship Credit in the amount of $1,500 for the freshman student (all of the first $1,000 and 50 percent of the second $1,000). The taxpayer can also claim the Lifetime Learning Credit in the amount of $700 for the junior student (20 percent of $3,500).
Student Loan Interest Deduction
This is, just as the name implies, a deduction for interest paid on student loans and is limited to $2,500 per year. According to the Minnesota Higher Education Services Office, a previous requirement has been eliminated that those eligible can only deduct interest paid during the first 60 months.
The deduction is available to any student with a "qualified" school loan who meets certain required income guidelines. They must be a student themselves or a parent, spouse or guardian of a student. However, students cannot claim the deduction if they are listed as dependents on their parents' tax returns, and a spouse must be filed jointly with the student.
How to get the tax breaks
The Student Loan Interest Deduction, Hope Scholarship and Lifetime Learning Tax Credit are eligible to students of any college, university, vocational school or other postsecondary educational institution eligible for federal Department of Education-administered student aid programs.
Most important for students using these programs is to obtain IRS form 1098 from their postsecondary institution. The 1098 form details how much qualified tuition and fees a student has paid in the past year.
For more information on these tax programs, contact:Internal Revenue Service --www.irs.gov