Tax Benefits for Education

Find out more:

• What is Financial Aid?
• Borrowing Options
• Tax Benefits for Education
• What Does It Mean to Co-sign a Loan

Paying for college can add up to big savings when filing your federal tax returns. There are tax credits, deductions and advantages for the taking. A tax credit reduces the amount you may have to pay in federal taxes, while a deduction reduces the amount of your annual income that is subject to tax.

What benefits are available?

Several tax benefits are available to help families meet the cost of postsecondary education. These tax benefits are intended to help students and their parents fulfill a variety of education objectives. However, PNC does not provide tax advice and makes no representation or warranty as to the accuracy of the information. Please consult your tax advisor for tax advice on the matters contained in this brochure. This publication provides only a overview of tax benefits that may be available to you if you are paying higher education costs for yourself or another student. Please refer to publication 970 for more details.

Three tax credits highlighted below:

• The American Opportunity Credit
• The Hope Credit
• The Lifetime Learning Credit

Other benefits include:

• Deduct student loan interest;
• Receive tax-free treatment of canceled student loans;
• Deduct tuition and fees for higher education;
• Make early withdrawals from any type of individual retirement arrangement (IRA) for education costs without paying the 10% additional tax;
• Cash-in savings bonds for education costs with out having to pay tax on the interest; and
• Receive tax-free educational benefits from your employers

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Be sure to refer to publication 970 for more information.

What is student loan interest?

It is interest you paid during the year on a loan you took out to pay qualified higher education expenses such as tuition and fees; room and board; books, supplies, and equipment; or other necessary expenses (such as transportation) that were:

• For you, your spouse, or a person who was your dependent when you took out the loan, or
• Paid within a reasonable period of time before or after you took out the loan, and for an eligible student.

What can you include as interest?

Loan origination fees (other than fees for services), capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans are considered to be student loan interest. If eligible, you can deduct all remaining interest paid during the life of the loan, including both required and voluntary interest payments.

Please note that revolving lines of credit, such as credit card debt, qualify if the borrower uses the line of credit only to pay qualified higher education expenses. Interest on refinanced loans may include consolidation loans and collapsed loans (two or more loans of the same borrower that are treated by both the lender and the borrower as one loan). Voluntary interest payments are those made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment.

What does not count as interest?

A loan from a related person, qualified employer plan, or a loan for which you were not legally liable.

Who can claim the deduction?

Generally, you can claim the deduction if all of the following requirements are met: your filing status is any filing status except married filing separately; no one else is claiming an exemption for you on tax return; and you paid interest on a loan for qualified higher education expenses for a reasonable period of time for an eligible student.

How much interest can you deduct?

Your student loan interest deduction is the total interest paid in 2009 or the lesser of $2,500. However, the amount determined may be gradually reduced (phased out) or eliminated based upon your filing status and modified adjusted gross income (MAGI) explained below.

FILING STATUS	MAGI	INTEREST DEDUCTION
Single,	Not more than $60,000	Not affected by phase out
Head of Household, or	More than $60,000 but less than $75,000	Reduced because of phase out
Qualified Widow(er)	$75,000 or more	Eliminated by the phase out
Married Filing Joint Return	Not more than $120,000	Not affected by phase out
	More than $120,000 but less than $150,000	Reduced because of phase out
	$150,000 or more	Eliminated by the phase out

To calculate your phase out, multiply your interest deduction (before the phase out) by a fraction. The numerator is your adjusted gross income minus $60,000 ($120,000 in the case of a joint return). The denominator is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before phase out). This result is the amount you can deduct.

Example: During 2009 you paid $800 interest on a qualified student loan. Your 2009 MAGI is $145,000 and you are filing a joint return. You must reduce your deduction by $133, as calculated below:

	American Opportunity Credit	Hope Credit	Lifetime Learning Credit
Maximum Credit (additional requirements may apply)	Up to $2,500 credit per eligible student	Up to $1,800 ($3,600 if a student in a Midwestern disaster area) credit per eligible student	Up to $2,000 ($4,000 if a student in a Midwestern disaster area) credit per eligible student
Limit on modified adjusted gross income (MAGI)	$180,000 if married filling jointly; $90,000 if single, head of household, or qualifying widow(er)	$120,000 if married filling jointly; $60,000 if single, head of household, or qualifying widow(er)	$120,000 if married filling jointly; $60,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable	40% of credit may be refundable; the rest is nonrefundable	Nonrefundable—credit limit to the amount of tax you must pay on your taxable income	Nonrefundable—credit limit to the amount of tax you must pay on your taxable income
Postsecondary number of years	Four years of postsecondary education	First two years of postsecondary education	All years of postsecondary education and courses to acquire or improve job skills
Number of tax years available	Four tax years per eligible student (including any years the Hope Credit was claimed)	Two tax years per eligible student	Unlimited
Type of degree	Undergraduate degree or other recognized education credential	Undergraduate degree or other recognized education credential	Student does not need to be pursuing a degree or any other recognized education credential
Number of courses	Student must be enrolled at least half time for at least one academic period during the tax year	Student must be enrolled at least half time for at least one academic period during the tax year	One or more courses
Felony drug conviction	None on the student’s record	None on the student’s record	Felony drug convictions are permitted
Qualified expenses	Tuition/fees, text books, supplies and equipment (purchased from the institution or elsewhere)	Tuition/Fees only. Additional expenses allowed for Mid-western disaster areas.	Tuition/Fees only. Additional expenses allowed for Mid-western disaster areas.
Payment for academic periods	Payments in 2009 for the academic period beginning in 2009 and the first three months of 2010	Payments in 2009 for the academic period beginning in 2009 and the first three months of 2010	Payments in 2009 for the academic period beginning in 2009 and the first three months of 2010