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A Hidden Financial Aid Gem Right Under Your Nose

A Hidden Financial Aid Gem Right Under Your Nose

Don't lose out on a bigger refund come tax season.

By Chris Diehl

April 21, 2009

Tax deduction:

  • Reduces the amount of money on which you will be taxed. The lower your tax bracket, the more money you can save (by percentage).
  • Example: If you owe $3,000 in taxes and claim a $2,000 tax deduction, you save a percentage of the $2,000 (not the full $2,000, as you would with a credit). The amount you save will depend on your tax bracket. If you’re in the 10% tax bracket, in our example you would save $200.

(Disclaimer: All figures are examples and not indicative of actual tax rates.)

The deduction to claim on educational expenses is the Limited Deduction for Tuition Expenses (read FastWeb’s Tax Deductions: Tuition and Fees

for more information). Because the law that allows this deduction was passed after IRS paper forms had been published, take special care when filling out your 1040 (.pdf) this year.


None
Credit
Deduction
Income
$30,000
$30,000
$30,000
Deduction
-0
-0
-$2,000
Taxable Income
= $30,000
= $30,000
= $28,000
Tax Rate
10% of $30,000
10% of $30,000
10% of $28,000
Tax Liability
$3,000
$3,000
$2,800
Credit
-0
-$2,000
-0
Bottom Line
= $3,000
= $1,000
= $2,800

Still Confused?

The GAO report estimated nearly 50 percent of paid tax preparers failed to take full advantage of all possible tax breaks. While your tax professional might suggest one of the credits or deductions, you may want to offer a friendly reminder to leave no stone unturned when it comes to sniffing out possible educational tax breaks. Also review FinAid’s Education Tax Benefits page, a wealth of information on this topic. The IRS also offers telephone assistance at: 1-800-829-1040.

Tax breaks are a lot less glamorous than scholarships and grants—no one is going to hand you an oversized check with your name on it. But it would be a mistake to dismiss them because they’re complicated. Tax benefits are out there, waiting for you to use them. Fight the intimidation factor and use the resource links in this article to sniff them out. Your time and effort may result in saving hundreds of dollars.

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