- Scholarship recipients must meet specific criteria regarding the use of the scholarship to prevent it from becoming taxable income. The recipient must attend a qualified school and must be pursuing a degree. Qualified schools include accredited educational institutions where educational activities occur between faculty and students. Also, the funds must be used to pay educational expenses. Educational expenses include tuition, fees, books and equipment. Educational expenses do not include living expenses, research or clerical help.
- Individuals who qualify for student loan cancellation can breathe a sigh of relief over not making student loan payments anymore. However, the forgiven portion of their loan may be considered taxable income. To escape taxation, the original loan must contain a provision that the loan would be canceled for one of three conditions. The student must work for a specified period of time, in a specific profession and for a certain type of employer.
- The American Opportunity Credit is a partially refundable tax credit that provides up to $2,500 for tuition, fees and supplies paid during the year. The Hope Credit, replaced by the American Opportunity Credit for most taxpayers, still exists for taxpayers with a student attending school in a Midwestern disaster area and only allows a credit for tuition and fees. The Hope Credit is limited to $1,800 per student. The Lifetime Learning Credit also provides up to $2,000 of tax credit for tuition and fees and applies to degree programs and job skill courses. Taxpayers can only claim one tax credit per student.
- The Tuition and Fees Deduction reduces taxable income for taxpayers. While a tax credit reduces the tax liability directly, a tax deduction only reduces the income by which the tax liability is calculated. This deduction does not apply if college expenses are paid through scholarships or employer reimbursement programs.
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