Higher Education Tax Benefits

There are several money-saving tax benefits available to taxpayers for federal tax years 2008 and 2009.* The IRS offers various tax savings to individuals and families who are paying for higher education.

Tax benefits for eligible individuals and families paying for higher education:

You may be able to deduct the cost of higher education for yourself, your spouse or a dependent, even if you do not itemize deductions on Schedule A, Form 1040. The Tuition and Fees Deduction can reduce the amount of your income that is subject to tax by up to $4,000 for qualified taxpayers.

Remember that a taxpayer may not claim this deduction AND one of the following in the same tax year: the HOPE Scholarship Credit, the Lifetime Learning Credit, the tax-free portion of a distribution from an Coverdell Education Savings Account or a Qualified Tuition Program. You cannot claim this deduction for expenses paid with tax-free scholarships, grants, employee-provided education assistance or tax-free interest on U.S. savings bonds.

Borrowers paying interest on eligible student loans may deduct up to $2,500 of the interest paid. To be eligible, the loan must have been used to pay for a student's tuition and other higher education expenses. Eligible expenses for students enrolled at least half time include tuition, fees, room and board, books, supplies, equipment and other expenses such as transportation.

The HOPE Scholarship Credit offers a tax reduction. With this tax credit for 2008, you can receive up to $1,800 per eligible student for a taxpayer paying education-related expenses during a student's first two years of college.

Eligible students must meet the following criteria:

For 2008, the HOPE Scholarship Credit equals 100% of the first $1,200 of the taxpayer's qualified "out-of-pocket" expenses for each student in the taxpayer's family. The student can be the taxpayer, the taxpayer's spouse or an eligible dependent.

The student must be listed as a dependent on the tax return in order to claim the HOPE Scholarship Credit. Either the parent or the dependent may claim the HOPE Scholarship Credit, but not both. Married taxpayers must file a joint return to be eligible.

Qualified expenses used to calculate the credit include tuition and fees, books, supplies and equipment only if fees and expenses must be paid to the institution as a condition of enrollment or attendance. Room and board, transportation and other living and medical expenses are excluded.

The American Recovery and Reinvestment Act of 2009, also known as The Recovery Act, modifies the HOPE Scholarship Credit for 2009 and 2010 and is referred to as the American Opportunity Tax Credit for those years. The allowable modified credit is up to $2,500 per eligible student per year for qualified tuition and related expenses paid in each of the first four years of the student's post-secondary education in a degree or certificate program.

The modified credit is 100% on the first $2,000 of qualified tuition and related expenses, and 25% on the next $2,000 of qualified tuition and related expenses. For purposes of the modified credit, the definition of qualified tuition and related expenses is expanded to include course materials. The modified credit is available to an individual student for four years, provided that the student has not completed the first four years of post-secondary education before the beginning of the fourth taxable year.

The Lifetime Learning Credit is a benefit of up to $2,000 per family paying for education-related costs. Instead of benefiting freshman and sophomore college students, this credit is designed to provide financial assistance to college juniors and seniors, graduate and professional degree students and adults who want to return to school or update their skills or change careers. Unlike the HOPE Scholarship Credit, the Lifetime Learning Credit is calculated on a per-taxpayer (family) basis, regardless of the number of post-secondary students in the family.

Eligible students must be enrolled in at least one post-secondary course at an eligible school, but do not need to be pursuing a degree. This tax credit is equal to 20% of the first $10,000 of qualified expenses paid. Tuition and related fees are qualified expenses. Books, supplies and equipment may also be considered. Room and board as well as other living and medical expenses are not qualified expenses. A student must be listed as a dependent on your tax return in order to claim the credit.

Formerly called an Education IRA, the Coverdell Education Savings Account (ESA) is a trust or account to help families save money to pay for a student's expenses. Anyone may deposit up to $2,000 per year into an ESA in the child's name for each child under the age of 18. Contributions grow tax-free in the account and withdrawals are tax-free, but only if the qualified expenses for the year equal or exceed the amount withdrawn. If expenses don't meet or exceed the amount withdrawn in a particular year, the excess amount may be subject to income tax and an additional tax of 10% to the extent that such excess represents earnings that have accumulated tax free in the account.

A Qualified Tuition Program (QTP) allows participants to contribute to an account that is established for paying qualified higher education expenses of the beneficiary or to prepay tuition benefits on behalf of a student. The earnings from these programs may be excluded from tax to the extent that they are used to pay for qualified education expenses (tuition, fees, books, supplies, certain room and board expenses, etc.). Taxpayers may also claim a HOPE Scholarship Credit, Lifetime Learning Credit or claim a Tuition and Fees Deduction in the same year of receiving a tax-free distribution from a QTP as long as the same expenses are not used for both benefits.

Employees can exclude up to $5,250 of employer-provided education benefits from their income for undergraduate and graduate courses. Courses do not need to be job related to qualify for this exclusion. If the employer pays all the education expenses for a particular year, the HOPE Scholarship and Lifetime Learning Credits may not be claimed during the same year.

To learn more about the information outlined above, contact the IRS directly or consult the IRS Publication 970 on Tax Benefits for Education. Call 1-800-829-3676 or visit www.irs.gov.

*Important Information:Chase does not and cannot advise individual borrowers as to whether and how much in student loan interest they can deduct of the personal income tax implications of any tax benefit. Tax implications stated are based on general tax principles and may or may not apply to your individual situation. To determine any individual tax benefit, borrowers should consult a qualified tax advisor or accountant, or contact the Internal Revenue Service directly. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

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This information was current as of 03/01/2009 and is subject to change.