College students and recent grads may take advantage of four tax breaks that can add up to serious savings.
Current college students paying interest on unsubsidized loans and student loan borrowers who have graduated or withdrawn and are repaying their loan can claim a tax deduction on their federal student loan interest. Students lucky enough to have parents helping with their student loan bill can still claim the interest rate reduction according to Kiplinger.
In the past, if parents repaid student loans for their child, neither could reap the tax benefit. Now the IRS treats student interest payment as if it had been paid by the student borrower, even if mom and dad made the payments. A student loan borrower who is not claimed as a dependent can qualify to deduct up to $2,500 for student loan interest.
Through the Hope Scholarship Tax Credit or the Lifetime Learning Tax Credit students can deduct the total credit amount directly from the taxes they owe, which makes them more valuable than a deduction. However, a student or family cannot get a refund for these credits if they do not pay taxes. A family that owes less in taxes than amount of the Hope tax credit it is eligible to receive can only get a credit equal to the taxes owed.
A family may claim the Hope Scholarship Tax Credit up to $1,650 for each eligible dependent for up to two tax years (100% of the first $1,100 and 50% of the second $1,100 paid for qualified education expenses). The Hope credit is only available for a student's first two years of postsecondary education. The credit is phased out based on the student's or family's income.
A student or family may claim a tax credit of up to $2,000 per tax year with the Lifetime Learning Tax Credit. The amount of the Lifetime Learning tax credit is 20 percent of the first $10,000 of qualified educational expenses paid for all eligible students. The Lifetime Learning credit is available for all years of postsecondary education and for courses to acquire or improve job skills, unlike the Hope credit which is only available for two years.
Students may also want to consider the Tuition and Fees Tax Deduction, which can reduce taxable income by as much as $4,000. Unlike the tax credits, this is a deduction that lowers the amount of taxable income attributed to the student or family. Students can claim this deduction even if they do not itemize deductions on Schedule A of Form 1040. This deduction may benefit students who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.
Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible postsecondary institution. Personal living and family expenses, including room and board, insurance, medical and transportation, are not deductible expenses.
Students who are required to move to take their first job will qualify for a moving expense deduction. Students (or any others) who have moved more than 50 miles for work can deduct the cost of moving themselves and their stuff. Expenses associated with driving your car to the new area will also get you a deduction of 20 cents per mile plus parking fees and any tolls.
Students with children or other dependents should make sure they claim a child tax credit for each eligible child. Students may claim anyone who is their son, daughter, stepchild, foster child, brother, sister, stepsister, or a descendant of any of these who is younger than 17 in 2010 and who did not provide more than half of their own financial support. The person must have lived with the taxpayer for more than half of the year and must be a U.S. citizen, national, or resident alien.
This credit is phased out based on income and the total credit cannot exceed the amount of taxes owed. An Additional Child Tax Credit is available to certain individuals who get less than the full amount of the child tax credit. This credit can provide students a refund even if they owe no taxes.