Credits can ease tuition bite
By Sandra Block
By Sandra Block
Families make a lot of sacrifices to send their children to college. They drive old cars, give up premium cable and skip their annual Las Vegas vacation.
Yet, millions of families leave money on the table every year by overlooking valuable education tax breaks. A 2005 study by the Government Accountability Office found that 27 percent of taxpayers who were eligible for a tax deduction or credit for their college expenses didn't claim the tax break. The average savings from overlooked credits and deductions was $169, but 10 percent of taxpayers passed up savings of $500 or more, the GAO said.
"It's a fairly confusing system," says Mark Brenner, vice chairman for College Loan Corp. "The reality for most American families paying for college is that they're more focused on paying tuition than they are about the tax savings."
Still, diving into the education tax maze pays off. Start by familiarizing yourself with the credits and deductions available to you. Some things to keep in mind:
A credit is a dollar-for-dollar reduction in your taxes. A deduction reduces your taxable income. A $500 credit cuts your taxes by $500; a $500 deduction saves $140 if you're in the 28 percent tax bracket.
Apparently, this distinction is lost on a lot of people. The GAO study found 21 percent of taxpayers who claimed a tuition deduction would have saved more by claiming the Lifetime Learning Credit.
You can't take both credits at the same time for the same child, so during the first two years, you need to determine which one delivers the bigger tax break.
The maximum Lifetime Learning Credit is 20 percent of the first $10,000 you spend on college expenses, up to $2,000. To get the maximum, you have to shell out at least $10,000. If your college costs are considerably lower than that, the Hope may be the better deal.
For 2005, you can claim a credit for up to 100 percent of your first $1,000, and 50 percent of the next $1,000, says John Roth, analyst for tax publisher CCH. In 2006, the maximum Hope credit will go up to $1,650.