Education and Job Security

In this tough job market, many workers are taking courses or pursuing degrees to improve their skills so they can keep their jobs or find new ones in case they are laid off. Be sure to follow tax law requirements so you can write off some or all of your education costs.

Relying on Employer-Paid Education

If your company allows you to take courses, you may be able to exclude some or all of this benefit from income.

• If provided under an education assistance plan, $5,250 is excludable — the courses need not be job related. Ask the plan administrator what you have to do to qualify for this benefit.
• Any amount if job related (it qualifies as a working condition fringe benefit if the costs would have been deductible if you’d paid for them)

Scholarships and Fellowships

Scholarships are tax free if granted to study in a degree program. There is no dollar limit on how much you can receive tax free. However, the tax-free portion is limited to tuition, course-related fees, books, supplies, and equipment. Any portion of the scholarship for room and board or incidentals is taxable. Also, certain awards that may appear like scholarships are still taxable (e.g., a Fulbright award is taxable unless the foreign earned income exclusion applies).

Paying Your Own Way

If you aren’t fortunate enough to have an employer pay your way, there are still tax incentives to help you reduce your out-of-pocket costs.

Tuition and fees deduction. You can take an above-the-line deduction (no itemizing required) for tuition and fees for higher education for yourself, your spouse, or a dependent. The tuition and fees deduction is limited to $4,000 ($2,000 for those with higher income), no matter how many qualified people are in attendance.

However, you qualify only if your modified adjusted gross income (MAGI) does not exceed a set amount.

• For the $4,000 deduction limit: Not more than $130,000 if married filing jointly ($65,000 for all other filers)
• For the $2,000 deduction limit: More than $130,000 but not more than $160,000 if married filing jointly (more than $65,000 but not more than $80,000 for all other filers)

Tax credits. You can take a Hope tax credit for tuition and fees for the first 2 years of higher education in a course of study leading to a degree. The credit applies for each eligible person who is a freshman or sophomore. The credit amount is 100% of the first fixed cost and 50% of the next fixed cost. Fixed costs can be adjusted for inflation. In 2008 and 2009, that fixed cost is $1,200, so the top credit per eligible student is $1,800 (100% of $1,200, plus 50% of $1,200).

Usually, the credit relates only to expenses paid within the year. However, you can claim a credit if you prepay for an academic period that begins within the first 3 months of the following year.

Or you can take a Lifetime Learning credit tax for tuition and fees for any higher education, including graduate school. The top credit is $2,000. The credit applies per taxpayer, so if you have three students in college and/or graduate school at the same time (for example, yourself and 2 children), your top credit is still $2,000. The credit applies whether you are studying for a degree or simply taking a course in a nondegree program.

These tax credits can be claimed only if your MAGI does not exceed a set threshold.

Cash in savings bonds. If you’re holding U.S. savings bonds (series EE or I) and you were over 24 years old when you bought them, you can redeem them and avoid tax on the interest if the proceeds are used for qualified higher education costs for yourself, spouse, or dependent. There is no limit on the amount of bonds that can be redeemed as long as redemption proceeds don’t exceed tuition and fees. However, you can use this interest exclusion only if your MAGI doesn’t exceed set limits:

• For 2008, the phase-out range is $100,650 to $130,650 for those who are married filing jointly and $67,100 to $82,100 for other filers.
• For 2009, the phase-out range is $104,900 to $134,900 for those who are married filing jointly and $69,950 to $84,950 for other filers.

Itemized deduction for education. If you don’t qualify for any of these breaks (e.g., your MAGI is too high), you can still deduct education costs as an unreimbursed employee business expense (a miscellaneous itemized deduction). To use this deduction, the courses must be taken to maintain or improve your current job skills and cannot qualify you for a new line of work. Deductible expenses include not only the cost of courses and related fees, but also travel to and from the courses. Of course, you benefit from miscellaneous itemized deductions only if they exceed 2% of your adjusted gross income and you are not subject to the alternative minimum tax.

Help for Military Personnel

Under a new GI bill, certain military personnel can now obtain greater financial assistance in pursuing an education. These include:

• Paid up-front tuition (capped at more expensive schools)
• Annual stipend of $1,000 to cover books and supplies
• Monthly living stipend based on the Department of Defense Basic Housing Allowance for the region in which the person attends school

The benefits, all of which are excludable from income, must be used within 15 years of the completion of military duty. Details of the GI bill can be found at www.gibill.va.gov.