Sander & Associates, P.A.

Many middle-class families struggle, barely saving enough to fund their retirement plans, let alone meet future education costs. Then those astronomical college bills arrive.

Fortunately, the government offers some tax breaks that can help you meet your college costs. If you qualify, two credits apply to education costs incurred by you, your spouse and your dependents. You are permitted to use whichever one reduces your tax bill the most. In 2006, joint filers with "Modified Adjusted Gross Income (MAGI) " over $90,000 and singles with MAGI over $45,000 will have their tax benefits from education credits reduced, but can still have some benefit from careful planning.

The Hope Scholarship credit can reduce your tax bill by as much as $1,650 per eligible student. (The credit is for 100% of the first two years of post-secondary educational costs up to $1,100 per year, plus 50% of the next $1,100.) In order to qualify, the costs must be for a program that leads to a degree, certificate, or other recognized credential. The student must be attending school at least half time. The Hope credit is allowed on a per student basis, and can be claimed for more than one student on a tax return.

The Lifetime Learning credit is allowed on a per family basis. The maximum amount of the credit you can claim does not vary with the number of family members attending school, and is 20% of the first $10,000 in qualifying costs in 2005. That's a maximum credit of $2,000. Unlike the Hope Credit, the Lifetime Learning credit does not require the student to attend half time or even to be working toward a specific degree. You can even claim the credit for a single class at a community college.

Taxpayers enrolled and attending an eligible institution located in the "Gulf Opportunity Zone" (areas affected by hurricanes Katrina, Rita, and Wilma, in declared federal disaster areas), are eligible for expanded education credits. The Hope Scholarship credit is expanded to 100 percent of the first $2,000 and 50 percent of the next $2,000 (a maximum of $3,000), and the Lifetime Learning credit is expanded to 40 percent of the first $10,000 (a maximum of $4,000).

Expenses that qualify for these credits are tuition and fees required for enrollment or attendance, plus payments to the educational institution for books and supplies. Payments for meals and lodging, or payments to a bookstore for books and supplies do not qualify, except for those students that qualify for the expanded credits as a result of attending a qualified institution in the Gulf Opportunity Zone.

Your eligible expenses will qualify for the Hope and Lifetime Learning credit even if they are paid from the proceeds of student loans. The funds must be paid to the educational institution during the tax year in order to qualify for the credit.

GETTING A DOUBLE DEDUCTION FOR COLLEGE COSTS

With these favorable tax laws it may be more beneficial to fund your pension than to commit the dollars to education IRA's or prepaid tuition programs. That's because the pension will give you the same tax-deferred growth without impacting financial aid eligibility.

Investing outside a pension plan may reduce available loans, scholarships and forgiveness of student loan interest. Student loans are available when the student is enrolled in a qualified institution of higher learning. Interest accruing on these loans while enrolled is forgiven for students that financial aid departments determine to be at or below qualifying income levels. For those with higher incomes, interest is added to the principal amount of the loan and repayment usually does not begin until six months after graduation.

While the student is enrolled, interest is deferred and you still get tax credits for the loan proceeds you use for education expenses.

After graduation, the loans carry a reduced rate of interest (since the interest expense is generated by a government sponsored student loan) and even that may be deductible.

A maximum $2,500 interest deduction is available to single taxpayers with Modified Adjusted Gross Income (MAGI) under $50,000 and joint filers with MAGI under $105,000. The deduction phases out for single taxpayers between $50,000 and $65,000 of MAGI and joint filers between $100,000 and $135,000 of MAGI.

You may be saying to yourself, "But we make more than $130,000!" True, but your children may not when they complete their degrees. Their income level determines whether they are qualified for this deduction or not. If they do qualify, they can make the loan payments and claim the student loan interest deduction.

WE CAN HELP

It can cost you thousands of dollars over the entire period of enrollment if you miss these credits and other benefits. We are highly experienced in this area and can help you use the tax laws to reduce your education costs. Call to arrange an appointment to review your plans for funding education.