Take Advantage of Education Benefits and Deductions on Your Taxes
If you are a student and you are doing your taxes this year, there are a few things you should know before you start. Did you know you can get federal tax breaks on education related expenses? These benefits exist, you just have to know about them. By being available to part-time, full-time, married students and parents of dependent students, these benefits and credits can save you a nice chunk of cash when you go to the taxman this year.
The Hope tax credit is granted to students who have not completed the first two years of postsecondary education, are enrolled in a program that leads to an educational credential (a degree or certificate) and are taking at least half the normal full-time course load for a major for at least one academic period. With this credit you may reduce your federal income tax by as much as $1,650 per student for out-of-pocket tuition and fees, but you may only claim it for two years.
The Lifetime Learning tax credit is like the Hope tax credit but is not based on the student’s workload and is allowed for one or more courses. The Lifetime Learning tax credit is like the Hope tax credit in every way except that it has almost no restrictions when compared. It has up to $2,000 credit per return, is available for all years of your college education and also is available for an unlimited number of years.
Taxpayers can reduce income subject to tax by up to $4,000 for tuition and other related expenses. Qualifying expenses are tuition and other fees required for enrollment or attendance at an eligible college, university or vocational school.
A deduction I have written about before, the Student Loan Interest Deduction should be used if you have paid yearly interest on your student loans. Your deduction may be as high as $2,500. To qualify, for the Student Loan Interest Deduction you should have used proceeds from the loan toward higher education expenses, such as tuition, housing, supplies and any other miscellaneous expenses relating to the college experience.You will receive a Form 1098-E, if you paid $600 or more in interest on a qualifying student loan during the year.
The Katrina Emergency Tax Relief Act of 2005 provides tax relief for all people, not just students, affected by hurricanes Katrina, Rita and Wilma. Under this Act, you may be able to claim a student loan interest deduction, education credit and/or a tuition deduction among other non-student type deductions. Check out Publication 4492 from the IRS website for additional information or ask a tax professional if you qualify.
To claim these deductions on your taxes this year, you must file a 1040 or 1040A form and in addition, for the Hope and Lifetime Learning tax credits, attach Form 8863 (Education Credits), which can be found on the IRS’s website. In all cases for these deductions, itemizing is not a requirement.
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Have an emergency account that’s difficult to access.
If you’re smart enough to have already started an emergency fund, you might want to opt for two. You should have some emergency cash at home but you should also have an emergency fund in an account.
Try not to make that fund too easy to access. For instance, don’t have a debit card for it. If you have to go to the bank during regular business hours and stand in line to access your money, you’re much less likely to impulsively spend it.
If you want to start saving money in an account and don’t think you’re going to be militant and dedicated enough to go to the bank every pay day and put money in, consider splitting your direct deposit so that the money goes in automatically. If your employer doesn’t offer this option, consider talking to your bank about doing an automatic transfer for you on specific days of the month; preferably payday when the funds go right in.
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