Publication 970

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Tax Benefits for Education

Overview

This publication explains tax benefits that may be available to you if you are saving for or paying education costs for yourself or, in many cases, another student who is a member of your immediate family. Most benefits apply only to higher education.

What is in this publication. Chapter 1 explains the taxability of various types of educational assistance, including scholarships, fellowships, and tuition reductions.

Three tax credits for which you may be eligible are explained in chapters 2, 3, and 4. These benefits, which reduce the amount of your income tax, are:

  • The American Opportunity Credit (a modification of the Hope credit for 2009 and 2010, added by ARRA, and extended by HR 4853, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, December 2010, to apply to 2011 and 2012)
  • The Hope credit, and
  • The lifetime learning credit.

Ten other types of benefits are explained in chapters 5 through 13. With these benefits, you may be able to:

  • Deduct student loan interest,
  • Receive tax-free treatment of a canceled student loan,
  • Receive tax-free student loan repayment assistance,
  • Deduct tuition and fees for education,
  • Establish and contribute to a Coverdell education savings account (ESA), which features tax-free earnings,
  • Participate in a qualified tuition program (QTP), which features tax-free earnings,
  • Take early distributions from any type of individual retirement arrangement (IRA) for education costs without paying the 10% additional tax on early distributions,
  • Cash in savings bonds for education costs without having to pay tax on the interest,
  • Receive tax-free educational benefits from your employer, and
  • Take a business deduction for work-related education.

Note: You generally cannot claim more than one of the benefits described in the lists above for the same qualifying education expense.

Comparison table. Some of the features of most of these benefits are highlighted in Appendix B, beginning on page 72 of Publication 970. This general comparison table may guide you in determining which benefits you may be eligible for and which chapters you may want to read.

Analyzing your tax withholding. After you estimate your education tax benefits for the year, you may be able to reduce the amount of your federal income tax withholding. Also, you may want to recheck your withholding during the year if your personal or financial situation changes. See Publication 919, How Do I Adjust My Tax Withholding, for more information.

Glossary. In this publication, wherever appropriate, we have tried to use the same or similar terminology when referring to the basic components of each education benefit. Some of the terms used are:

  • Qualified education expenses,
  • Eligible educational institution, and
  • Modified adjusted gross income.

Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses are not necessarily allowed for each benefit. For example, the cost of room and board is a qualified education expense for the qualified tuition program, but not for the education savings bond program.

Many of the terms used in the publication are defined under Glossary near the end of the publication. The glossary is not intended to be a substitute for reading the chapter on a particular education benefit, but it will give you an overview of how certain terms are used in discussing the different benefits.

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