Q: I am entering a graduate program not related to my current job. Are there any tax deductions or any write-offs for the large expense I will be incurring? Do you have any ideas on handling this large expense? There is money in my IRA plan from my retirement in 2008. Or should I get a student loan? Thanks -- Carrie, Orangevale
"A:" The tax code offers the following options to help defray your educational expenses:
Lifetime Learning Credit
You can reduce your income taxes owed by up to $2,000 per year. To claim this tax credit, you must be able to document expenses for tuition, enrollment fees, required books, etc.
To qualify for a portion or all of this credit, your income must be no more than $61,000, if you are filing as single, or $122,000, if you are filing a joint return.
Remember that a tax credit is a direct reduction of your tax liability, as opposed to a tax deduction, which reduces your income when determining your tax liability.
Student Loan Interest Deduction
You can deduct up to $2,500 per year, for interest on loans for educational expenses, e.g., tuition, enrollment fees, books, supplies, equipment, room & board, and other necessary expenses.
To qualify for a portion or all of this deduction, your income must be no more than $75,000, if you are filing as single, or $150,000, if you are filing a joint return.
Tuition and Fees Deduction
You can deduct up to $4,000 per year, for tuition and enrollment fees. No other educational expenses are eligible for this deduction.
To qualify for a portion or all this deduction, your income must be no more than $80,000, if you are filing as single, or $160,000, if you are filing a joint return.
You can only use "one" of the above three tax beneftis in any one year.
Education Exception to Additional Tax (Penalty) on Early IRA Distribution
Early (under age 59 ½) IRA distributions for educational expenses, e.g., tuition, enrollment fees, books, supplies, equipment, room & board (if at least a half-time student), and expenses for special needs services, are exempt from the 10% early distribution penalty.
There is no income phase out for this tax benefit.
In addition to looking at student loans and pulling money from your IRA, you should also pursue scholarships and grants. Websites that can help you with this include:
Scholarships.com and Finaid.org
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