College is one of the largest of life's expenses, ranging from several thousand to tens of thousands of dollars per year. The U.S. government encourages college and advanced studies, which improves the overall workforce with more qualified workers. The federal government provides a variety of financing programs and tax deductions to ease the financial burden on people who pursue college educations.
A college student is permitted to take a $4,000 tuition and fees deduction that is reported directly on Form 1040 or Form 1040A. These are deducted from tuition and fees but don't apply to books, health care or other living expenses. The student who directly pays for college can claim the deduction. A parent who pays the tuition could also claim the deduction as long as the child is listed as a dependent on his tax returns.
Those students with gross incomes above $65,000 annually who are unmarried aren't permitted to take the full $4,000 deduction. Likewise, those filing jointly who make more than $130,000 aren't eligible for the deduction. For single filers making between $60,001 and $80,000 or married filers making between $130,001 and $160,000, a $2,000 deduction is permitted. Those with greater incomes aren't eligible to receive any deduction.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts are a type of IRS-sponsored tax account used to grow savings for college tuition expenses. Contributions to ESAs are not tax deductible, though all of the gains grow tax-free, so when it comes time to pay for college, there will be no capital gains tax. If you have more money in the ESA than is needed, a 10 percent tax will be applied for personal income.
Tax deductions and financing programs granted by the IRS are only permitted for eligible schools. Eligible schools are those that are degree-granting institutions accredited by the Department of Education. Virtually every public and private educational institution has been granted this accreditation, but some small or niche schools are not accredited. For those schools, the government does not grant loans or allow tax deductions.
- graduation image by Andrey Kiselev from Fotolia.com