Education Tax Breaks and Online Education

Definition: "A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself." IRS Publication 970 (2005), Tax Benefits for Education

1

Hope Scholarship Credit

Notes the National Association of Student Financial Aid Administrators, "The Hope Credit is a tax credit, not a scholarship." If you are eligible, you can claim up to $1,500 for qualified tuition and related educational expenses.

"It's a non-refundable credit," Mr. Grech of the IRS Education Credits Department explains. "You have to owe taxes and file a federal tax return to receive this credit. You can't take nothing from nothing."

The Hope Scholarship Credit is available:

• until the first two years of postsecondary education at an eligible educational institution are completed
• for two years
• to students enrolled in a program leading to a degree, certificate, or other recognized educational credential
• to students enrolled at least half time for at least one academic period beginning during the year
• to students without a felony drug conviction on their record

To determine your own eligibility, and to read a strict definition of qualified education expenses, visit the IRS website at http://www.irs.gov/. The latest information for 2006 has yet to be released.

"Keep looking at our website for updates," advises Mr. Grech.

2

Lifetime Learning Credit

The Lifetime Learning Credit is broader in scope and, if you are eligible, you may be able to claim a credit of up to a maximum of $2,000 for qualified education expenses. The $2,000 is equal to 20% of the first $10,000 in higher education expenses per family for the year.

The Lifetime Learning Credit is available:

• for all years of postsecondary education and to acquire or improve job skills
• if you attend full-time, half-time, or less-than-half-time basis
• for an unlimited number of years
• for one (or more) educational courses
• even to those without a squeaky clean record (i.e. you have been convicted of a federal or state felony drug offense)

Visit the IRS website at http://www.irs.gov/ and follow the flow-chart to determine your eligibility.

3

Student Loan Interest Deduction

You may be able to deduct the interest on your federal or private loans.

The maximum deductible interest on a qualified student loan is $2,500. The amount you are allowed to deduct is based upon your filing status and your MAGI. Visit http://www.irs.gov/faqs/faq-kw187.html for more information and the to determine your eligibility.

While the IRS website can be intimidating to navigate, "[i]t helps if you know what you're looking for," says Ms. Brown in the Student Loan Interest Deduction department.

"The primary publication is Publication 17, Federal Income Tax Return. Specifically, you may want to look at 970, Chapter 4 for information about the student loan interest deduction." Information about the education credit can also be found in 970.

You can have these forms mailed to you, pick them up at a taxpayer assistance center, or download them from the website. However, Ms. Brown offers this tip. "Publication 17 is several hundred pages long. Publication 970 is shorter and subject specific."