Most people who earn income have to pay taxes to federal, state, and local governments. The amount of taxes you or members of your family pay may be reduced if income or savings is used to pay for or save for college, vocational school, or other postsecondary education.
Tax Credits
Each year people who earn income must figure out how much they owe the federal government for taxes. A tax credit lowers the amount of money a person must pay in taxes.
For example, federal Hope Scholarships are actually tax credits for which many students or their parents are eligible during the first two years of education after high school. If you qualify for a Hope Scholarship, your first $1,000 of tuition is credited against your taxes.
Of your next $1,000 in tuition, 50 percent—up to $500—is credited. Thus, you can earn a total tuition credit of up to $1,500 per student. Only those paying the tuition are eligible for this tax credit. Most families with high incomes do not qualify for the Hope Scholarship tax credit.
The actual tax benefits of the Hope Scholarship will change over time. Search the Internal Revenue Service (IRS) Web site for up-to-date information at www.irs.gov.
Tax-Deferred Plans
When you save or invest, your money earns money. Usually you have to pay taxes on these earnings, which, like salary, are considered to be income. In some cases, you can delay (defer) paying taxes on income set aside for postsecondary education.
An Education Retirement Account, or Education IRA, allows you, your parents, and your grandparents to save for college without paying taxes until later. A financial advisor can help your family make the best decisions.
If you withdraw money from an Education IRA to use for another purpose, you may have to pay a tax penalty on your earnings.
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