As summer fades into memory and classrooms come alive with students, those who pay the costs of education may find some relief in the various tax benefits associated with education-related expenses. Here’s an overview of the tax breaks available for 2004; details on each topic are in IRS Publication 970 — the topic links go to the related chapter.

Tax-Free Benefits — Certain payments or special programs’ distributions are free of tax when used for qualifying educational expenses. Such expenses cannot duplicate one another or be used to claim education credits or deductions.

• Scholarships, fellowships, etc. — Generally tax-free when used to pay qualified expenses for degree candidates at eligible schools.
  
  
• Coverdell Education Savings Account (ESA) — Distributions that don’t exceed the beneficiary’s qualified education expenses aren’t taxed. Unlike the items listed below, primary or secondary school expenses are eligible for ESA benefits. Beneficiary must be under age 18 when an ESA contribution is made; annual contribution limit is $2,000 and is reduced if contributor’s income is between $95,000 and $110,000 ($190,000 and $220,000, joint return).
  
  
• Qualified Tuition Program — distributions from state- or educational institution-sponsored programs aren’t taxed to the extent used for qualified education expenses.
  
  
• Education Savings Bond — interest on qualified U.S. Savings Bonds is tax-free if proceeds are used to pay qualified education expenses and income is under $59,850 ($89,750, joint return). The exclusion phases out as income rises to $74,850 ($119,750, joint return).
  
  
• Employer-provided educational assistance — employers can give up to $5,250 in tax-free benefits each year; courses do not have to be work-related.
  
  
• Cancelled student loan — although a cancelled debt is usually taxable, a student loan may not be if the cancellation depends on you working for a certain time in a specified occupation for a section 501(c)(3) organization.

Education Credits — reduce your tax, not just your income. You may claim only one of these credits for the same student in the same tax year. The credits phase out as income rises from $42,000 to $52,000 ($85,000 to $105,000, joint return).

• Hope Credit — applies only for the first two years of higher education and can be worth up to $1,500 per eligible student, per year.
  
  
• Lifetime Learning Credit — applies to most higher education, including non-degree courses, with a maximum credit of $2,000 per return (regardless of the number of qualifying students).

Tax Deductions — lower your taxable income with these breaks:

• Tuition and Fees Deduction — for a student for whom no education credit is claimed. Qualifying expenses must not have been paid with any other tax-free benefit. A maximum deduction of $4,000 if taxpayer’s income does not exceed $65,000 ($130,000 on a joint return); $2,000 maximum if income is between $65,000 and $80,000 (between $130,000 and $160,000, joint return).
  
  
• Deduction for work-related education — claim costs of education required to keep your job or to maintain or improve skills needed in your present work, but not if the education is needed to meet the minimum requirements of your position or is part of a program to qualify you for a new trade or business.
  
  
• Student loan interest deduction — maximum deduction of $2,500 for interest paid on qualified student loans. Phases out as income rises from $50,000 to $65,000 ($100,000 to $130,000, joint return).

Tax Exception — The additional 10% tax on an early distribution from an IRA does not apply up to the amount of qualified education expenses. (The regular income tax still applies to any taxable IRA distribution.)

Related Item: Publication 970, Tax Benefits for Education (PDF 368K) (Online version)