A Lesson in Tax Breaks for College

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Send a child to college and you'll end up with your fair share of homework trying to figure out how to pay for it. It's not an easy subject, even if you aced math in high school.

As it turns out, many parents aren't passing their college benefits courses, especially when it comes to education tax breaks. A Government Accountability Office report showed that one in four families with college-age kids earned a failing grade by not taking advantage of tax breaks designed to help them recoup some of their college costs. Even paid tax professionals miss out on these breaks.

The problem, for parents and tax preparers, stems from the complexity of the material. Education tax breaks are extremely complicated. But with college costs on the rise, the potential for tax savings is worth learning about them.

To take optimal advantage of the tax breaks, learn the details. That means seeing which education expenses qualify for various tax reductions. You'll have to figure out how each tax break is structured and whether you or your favorite college student qualifies. You'll also have to learn about how the breaks interact with each other and with education savings accounts.

Your curriculum includes:

  • Lifetime Learning Credit: This credit allows a family to claim a credit worth 20% of tuition and fees, up to $2,000 on each tax return. It's subject to a phase-out as your gross income rises.
  • Hope Credit: This benefit applies to taxpayers within the same income bounds as the Lifetime Learning Credit. It's worth up to $1,650 in each of a student's first two years of college.
  • Tuition and Fees Deduction: If extended, this tax goodie would allow some taxpayers to take an educational deduction worth up to $4,000. Families with higher incomes may qualify for a deduction worth up to $2,000.

Now, for the complications. First, the tuition and fees deduction doesn't actually exist right now. It's one of many tax breaks that routinely expires and is then routinely extended by Congress ... when it gets around to it. Often, Congress ends up pressing right up against the deadline, just like college students cramming for final exams.

Second, these benefits work in different ways. A credit reduces your taxes dollar for dollar, while a deduction reduces the amount of your income that's subject to tax. Often a credit is a better tax deal than a deduction, but not always. It will depend on the rest of your tax situation.

Third, you can claim only one credit or deduction for a student in a given year, even if it looks like more than one would apply. Yes, you have to pick just one. If you have more than one student in school at the same time, you'll have to look even more closely. The limits on the Lifetime Learning Credit apply to the entire tax return, even if there's more than one student in the house. That's not true of the Hope Credit.

Lastly, if you've saved for your children's college education through a tax-advantaged savings account, you may not qualify for any of these perks.

You can see why parents and tax professionals might be confused. Unfortunately, there are no easy answers. If you have a child heading to college soon, it's worth the time to learn about each credit and deduction and run some numbers.

Try testing different scenarios using the myriad 1040 tax calculators available on the Internet. There's one here, for example. Talk to a trusted tax professional, but keep in mind that their track record is just as bad as everyone else's. Your tax preparation software may also compute the optimal use of education tax benefits.

Go at the question a number of ways. If all your sources agree, you're probably headed down the right track. If they all give you a different answer, it's time to hit the books again.

For more on your life and taxes, read about:

At the time this article was published Fool contributor Mary Dalrymple welcomes your feedback. The Fool has a disclosure policy.

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