College Corner

Some Tax Financing Help for the 2008 Tax Year

Education weighs in as a big personal and family investment. When the time arrives to finance college directly, out of pocket, the investment can be big enough to ruin a family budget. Some of that expensive investment can be recovered through the federal tax system thanks to several options made available by Congress. There are three subsidies available for education that can be claimed on Form 1040, no doubt your favorite form. The education subsidies that will help finance your son or daughter's education show up on line 33, line 34, and line 50 for tax year 2008. Line 33 is known as the student loan interest deduction; Line 34, Tuition and Fees Deduction. Line 50 defines education credits, which permits a subtraction directly from tax obligations.

Line 33, the student loan interest deduction, allows a deduction from gross income for interest paid for a loan taken out to finance higher education expenses. The deduction can not exceed $2,500 a year. You must have an income less than $115,000 if filing jointly as a married couple, or $55,000 for single, head of household or widower. No one listed as a dependent on a parent's return can take these deductions.

Line 34, the tuition and fees deduction, was available in 2004 and 2005, but not 2006, then again in 2007. For 2008 it continues with its own special form, form 8917, to calculate tuition and fees deduction. In earlier years, there was a printed worksheet in the instructions booklet.

Up to $4,000 of tuition and education fees can be deducted from gross income. If your gross income is more than $160,000 for married filing jointly, or $80,000 for any of the other filing status, then the deduction is zero and you get no help. However, if your income is more than $130,000, but less than $160,000 for married filing jointly, or more than $65,000 and less than $80,000 for single, head of household, or widower, then up to $2,000 can be deducted from gross income. For those with income less than $130,000 for married filing jointly, or less than $65,000 for single, head of household, or widower, then up to $4,000 can be deducted from gross income. Expenses can be for more than one student. Since the tax rates are 25 percent and up to 28 percent in those brackets, these deductions represent a savings of $1,000. Since states typically tax their residents by federal adjusted gross income the federal deduction can also reduce state tax liabilities.

Line 50, tuition tax credit, is better yet because it is a credit and comes off tax payments and not income reported for tax computation. These credits are called the Hope Tax Credits and the Life Learning Credits. To use them you have to download a form. What else! The form is 8863 on the irs.gov site. The deduction is not available for those who take deductions on line 34.

Hope Tax Credits and Lifetime learning credits depend on adjusted gross income. They apply to each dependent student, or other students who are not claimed as dependents on another return. Using these credits depends on federal adjusted gross income. Hope Tax Credit and Lifetime Learning Credits are fully available for incomes less than $116,000 for those filing a joint return and $58,000 for those filing as single, head of household or a widower.

As income increases from $96,000 to $116,000 for those filing a joint return, or income increases from $48,000 to $58,000 for those filing as single, head of household, or widower the credit gradually drops to zero. The Hope credit can only be taken for freshman and sophomore students in postsecondary education and only for students enrolled half time or more in an accredited degree program. However, it pays all qualified educational expenses up to $1,200 and 50 percent of the next $1,200 up to a maximum $1,800 credit, or it reduces federal income taxes by $1,800.

Lifetime Learning Credits are a lifetime maximum of $2,000. They cannot be taken in the same year as the Hope credit, but the credits do not have to be taken all in one year. They must not exceed $2,000 in total. For practical purposes, the Lifetime Learning Credits are available in the junior and senior years.

Key to this entire issue is working closely with your accountant or financial planner to maximize your access to each of these tax savings. If you are a "do-it-yourselfer" be sure to double-check your computations. For most residents of the Washington metro area, the deductions allowed on line 33 of Form 1040 are available for those whose gross income is lower than $115,000. The deductions provided on line 34 of form 1040 are available for those whose income is lower than $160,000. Taking advantage of the Hope credits and Life Learning Credits is another potential tax benefit.

Regardless of where you fall on the income continuum, it is prudent financial management to investigate and pursue all available options at tax time. College funding is not getting any cheaper and every potential savings should be vigorously pursued.