Higher Education and Tax Breaks

Earning a college degree is not necessary to make a ton of money, but it sure helps your chances. Getting a higher education, however, is a catch-22 to some extent. You improve your earning potential, but you need money to do it.

The U.S. Government assists people who wish to pursue a college education. The U.S. Government has the ability to guarantees loans to almost anyone in any situation. These loans make higher education possible for millions of us. What fewer people realize is the government actively promotes education through tax incentives as well. If you take advantage of these incentives, you will find paying for college a bit less scary.

The simplest tax incentive is found in deductions. You can deduct up to $4,000 for college costs so long as your adjusted gross income is less than $65,000 for single filers and $130 for married filers. If your adjusted gross is above these caps, you can still get deductions. The deductions simply taper off.

While tax deductions are great, tax credits rule the day. Why? Tax credits are applied directly to the amount you owe in taxes After figuring your taxes. This dollar for dollar reduction in your taxes can make a world of difference when April rolls around each year.

When it comes to education tax credits, the Hope Scholarship and Lifetime Learning Credits are the key programs. With the Hope Scholarship, you can claim a tax credit in the amount of $1,500 for each of the first two years you attend college. The Lifetime Learning Credit is up to a $2,000. Importantly, there are income caps on these credits and you cannot claim them both in the same year.

Education Savings Accounts and 529 college savings plans are run similar to retirement plans. You can put money away on a tax sheltered basis. This includes $2,000 a year for ESAs, and up to $200,000 in a 529 plan. There is, however, a serious drawback to these plans. They can eliminate your eligibility for gaining financial aid for yourselves or your kids. Make sure you speak with a knowledgeable college financial planner before diving into them.