A Lesson on College Tuition Breaks

College has always been a good investment. And increasingly, it’s one that offers tax advantages as well.

The government has authorized a smorgasbord of tax deductions, credits, income exclusions and savings incentives over the last decade for people paying for higher education, said Mark Brenner, senior vice president of College Loan Corp. in San Diego.

“Just about anyone from a low- and moderate-income family should have an opportunity to receive one of the panoply of education-related breaks from the tax code,” Brenner said.

People who are currently paying for college -- for themselves or a child -- are likely to have four possible tax breaks to choose from. Two are tax credits, one is a deduction, and one is an exclusion from income.

All four have income limits, so people who earn more than set amounts may not qualify. In addition, only one of these tax breaks can be claimed per student, so those who qualify for more than one break will have a challenge figuring out which is best, said Eric Tyson, coauthor of “Taxes for Dummies.”

“You really have to do some analysis because if you use one, you can’t use another,” he said.

In most cases, tax credits are much more valuable than deductions because deductions reduce taxable income whereas credits reduce the tax that’s owed.

Thus, a $1,000 deduction is likely to reduce tax obligation by $300 for those paying 30% of their income in state and federal tax. A $1,000 credit, by comparison, reduces tax by the full $1,000.

The education tax credits phase out at somewhat lower income levels than the other breaks, however, making the deduction and income exclusions the only games in town for singles earning more than $51,000 and married couples earning $103,000 or more.

Here’s a look at the options:

* The Lifetime Learning Credit. This is a credit for people paying for college -- for themselves or their children -- at any stage in life. This credit doubled in value for the 2003 tax year, rising to a maximum of $2,000 from $1,000. The credit is good for 20% of up to $10,000 in tuition and fees for an eligible student during 2003. If you have $8,000 in tuition and fees, for example, your credit would be $1,600.

Taxpayers earning more than $41,000 when single and $83,000 when married begin to lose their ability to claim the credit. The credit is completely phased out once single income exceeds $51,000 and married income passes $103,000.

* The Hope Credit. This is for those who are paying college expenses for freshmen and sophomores only. Those who qualify get 100% of their first $1,000 in eligible expenses and 50% of the next $1,000 for a maximum credit of $1,500. The Hope Credit is generally the most lucrative option for those with relatively modest tuition costs.

This credit also phases out for single taxpayers earning more than $41,000 and married couples earning more than $83,000.

* The Tuition and Fees Deduction. This is a so-called before-the-line deduction because it can be claimed directly on the front of the 1040 tax form. It reduces taxable income by up to $3,000 for those paying college costs, and taxpayers do not need to itemize to claim it.

This deduction is available only to those earning less than $65,000 when single or $130,000 when married filing jointly.

* Exclusion from income. Investment returns on some savings bonds do not have to be counted as income for tax purposes. Parents who cash out Series EE savings bonds that were purchased after 1989 may be able to exclude the investment income if they use the proceeds to pay for education.

Eligibility to do this, however, also phases out for single filers earning $58,500 to $73,500 and for married couples earning $87,750 to $117,750.

Be sure to look closely at these options if you are currently paying for college.

And if you are saving for college or still paying off college loans, keep in mind that there also are tax breaks for college savings plans and for student loan interest.

*

Kathy M. Kristof welcomes your comments and suggestions. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com.