As we enter the back to school season, we would like to remind teachers, college students & parents of college students to save receipts especially for education related expenses. Don’t find yourself in the situation of misplacing a receipt and forgetting to take advantage of the tax credits and deductions that are available to you.

Below we highlight the tax benefits for teachers, college students & parents of college students.

1. Teachers Take Advantage of the $250 Tax Deduction
Yes, you can actually deduct up to $250 worth of purchases on your 1040 individual tax return for educational expenses related to the cost of books, supplies, equipment, & software using the classroom. The IRS defines eligible applicants as those who work 900 hours or more during a school yr as a teacher, instructor, principal or aid in a public, private or secondary school (IR-2007-158).

2. College Students Remember the American Opp. Tax Credit
Now up to $2,500, this credit modifies the existing Hope credit, thanks to the American Recovery Act.

• The Details. 100% of qualified tuition and related expenses of up to $2,000 can be claimed as a tax credit for each eligible student. After that, 25% of the next $2,000 can be claimed as a tax credit, bringing the total tax credit to $2,500. This credit can now be claimed during the first four years of college; it use to be the first two years.

What Can I Claim as a Tax Credit? Tuition and required fees, and NOW course materials for tuition and fees

Who Qualifies?
Single – phased out if your adjusted gross income (AGI) exceeds $80,000
Married – phased out if your adjusted gross income (AGI) exceeds $160,000

What if I don’t owe any or owe very little taxes because my income is so low?
You can receive a tax refund for up to 40% of the credit

3. The Lifetime Learning Credit Offers College Students Help
But, the American Opportunity Credit is generally a better option if you are eligible for that credit.

• The Details. Up to $2,000 can be claimed as a tax credit for all eligible students enrolled in an educational institution for a post-secondary degree or to improve or acquire skills.

What Can I Claim as a Tax Credit?
Tuition and any required fees

Who Qualifies?
Single – phased out if your adjusted gross income (AGI) exceeds $60,000
Married – phased out if your adjusted gross income (AGI) exceeds $120,000

Primary Benefit vs. American Opp Credit. This credit can be claimed even if you are taking one class which is different from the American Opportunity credit.

Major Drawbacks vs. American Opp Credit.1) This credit cannot be claimed for books, 2) the total credit amount is below the American Opportunity Credit & 3) generally less overall flexibility.

• Recommendation. Generally, if you qualify and had to choose between the two credits, the American Opportunity credit is more advantageous.

4. The Tuition & Fee Tax Credit is Another Option
This deduction doesn’t apply if 1) you take the American Opportunity or the Lifetime Learning Credit, 2) your married filing separate or someone else can claim you as a dependent.

• The Details. This deduction of up to $4,000 is for qualified higher education expenses for yourself, spouse, or your dependent.

What Can I Claim as a Tax Credit?
Tuition and any required fees

Who Qualifies?
Single – phased out if your modified adjusted gross income (AGI) exceeds $80,000
Married – phased out if your adjusted gross income (AGI) exceeds $160,000

• Major Drawback. This is a deduction of your taxable income not a direct reduction of your actual tax liability. For instance, if your income is $30,000, the deduction of $4K will reduce your taxable income to $26,000 vs. a credit which will directly reduce your actual tax liability). Generally, the tax credits will offer greater tax benefits.

Additional Tip – The 529 Savings Plans
For those of you that don’t know, a 529 savings plan is a tax-free college savings account sponsored by a particular state or groups of states that is used strictly for college expenses. You can now use money from your 529 savings plan to purchase computers and other technology related goods for your college education.