Although financial aid is by far the largest source of grants and scholarships, there are other ways to cut your college costs. One oft-overlooked source of savings is, brace yourself , the IRS. In 1997, Congress enacted two separate tax credits — ‘The American Opportunity’ Tax Credit (or the credit formerly known as the ‘HOPE Scholarship’) and the ‘Lifetime Learning’ tax credit — to help families afford higher education. The former, which was extended by President Obama last year, allows students who are pursuing a degree — or their parents if the student is a dependent — to claim a tax credit for up to $2,500 of tuition expenses per student for two taxable years. The Lifetime Learning tax credit allows a family to deduct a maximum of 20% of the first $10,000 of educational expenses.
Since these programs allow you to knock off dollars from your tax bill, they can be a good thing for many. Hey, every little bit helps. But like most complex programs, they are not without potential peril. First the obvious. Both programs have various eligibility requirements, income limitations and ‘double dipping’ penalties. (Uncle Sam doesn’t want familes with tax free college savings plans such as 529s and Coverdalls to pocket these tax credits for expenses paid for with money from these vehicles). The rules are confusing, filled with loopholes and landmines that can conflict with the Financial Aid regulations. As a result many families either wind up losing valuable scholarship dollars and/or tax credits, or inadvertantly get hit with unexpected income taxes and penalties.
I can’t explore all of the possible permutations in a short email and generalities can only go so far. If you’d like to know more, you can obtain the rules from IRS publication 970, ‘Tax Benefits for Education’, and as always, you should consult with a Certified Public Accountant or licensed advisor who knows the ins and outs of these rules before making any decisions or assertions.
Wishing you and your family a wonderful Thanksgiving!
Best,
Peter
