Paying for higher education can be a good thing, when doing taxes

Given today’s economic and employment outlook, the thought of paying for higher education can be discouraging. The average cost of higher education for students staying in their home state was about $ 6,400 and about $ 15,100 for out-of-state students in the 2009-2010 academic year, according to a survey by the National Center for Education Statistics (NCES). Looking at these statistics can be nerve-racking, but there is light at the end of the tunnel.

The U.S. government provides incentives, in the form of credits and deductions, to help decrease the economic impact of pursuing a college education, according to Lisa Lewis, TurboTax blog editor and CPA.

“Education credits can reduce your tax bill or increase your refund while education deductions may lower your taxable income and result in reduced taxes,” says Lewis.

The NCES revealed that nearly half of American undergraduates cut their college expenses by an average of $ 700 by taking advantage of tax credits or deductions. If you’re unclear about which one you qualify for, TurboTax easily does the behind-the-scenes calculations for you and figures out which credit or deduction you are eligible for and which one gives you the biggest tax break. You can also see how life events such as enrolling in college impact your taxes by using TurboTax TaxCaster 2011.

American Opportunity Credit and Lifetime Learning Credit

The education credits available through Dec. 31, 2012, include the American Opportunity Credit and the Lifetime Learning Credit.

The American Opportunity Credit is available to you or your dependent for the first four years of college if your modified adjusted gross income (AGI) is less than $ 90,000 or $ 180,000 if married filing jointly.

If you are eligible to claim the credit you can benefit from:

* Up to a $ 2,500 education credit per eligible student.

* Up to a $ 1,000 refund even if you don’t owe any taxes because 40 percent of the credit is refundable.

If you’re a professional student, the Lifetime Learning Credit may be ideal for you. With this credit, there is no limit on the number of years that can be claimed for you or your dependent, as long as your modified AGI is less than $ 60,000 or $ 120,000 if you are married filing jointly.

Benefits of the Lifetime Learning Credit include:

* Up to $ 2,000 tax credit per tax return.

* Eligibility even if you or your dependent takes only one class.

* Eligibility even if you or your dependent are not pursuing a degree.

Student loan interest deduction

According to the NCES, 56 percent of first-time, full-time students attending four-year institutions had student loans. With the state of the economy, that percentage is likely to increase.

If you’re repaying a student loan (during school or after graduating) for you, your spouse or your dependent, you may qualify to deduct student loan interest of up to $ 2,500 from your income subject to tax even if you don’t itemize your deductions. Generally the right to claim the tax deduction goes to the person legally obligated to pay interest on the qualified student loan.

Other qualifications include:

* Modified AGI of less than $ 75,000, $ 150,000 if filing a joint return.

* The loan was taken out only to pay for qualified education expenses.

* The student must be you, your spouse or your dependent.

* You, your dependent or spouse must have been enrolled at least half-time in a degree program.

* Qualified education expenses must have been paid or incurred within a reasonable period of time before or after the loan is taken out.

* Your loan was to attend an eligible educational institution.

Don’t miss out on the opportunity to get a better education and reap the benefits of these tax breaks.