The tentative federal tax deal dominating the news includes potential benfits for students and their families. 

Yesterday, the Obama administration struck a tentative deal with Republicans to temporarily extend Bush-era tax cuts in order to garner support for additional tax breaks, including a two-year extension of the American Opportunity Tax Credit.

The American Opportunity Tax Credit, which is scheduled to expire at the end of this year, provides a tax credit of up to $2,500 per student for those who make less than $80,000 ($160,000 for joint filers). This credit is partially refundable making it available to low-income families that don’t owe any taxes.

Despite the deal, there is a lack of consensus, making final passage of the tax-cut extension deal uncertain, especially in the House where there appears to be more opposition to parts of the agreement.

In addition to the American Opportunity Tax Credit several other provisions are scheduled to expire at the end of this year if the 111th Congress is unable to extend expiring higher education tax breaks before it adjourns.

• Section 127 Employer Provided Education Assistance — Allows employers to offer up to $5,250 in tuition assistance to employees annually. These funds offer tax benefits to both employers and student employees.
• Enhanced Student Loan Interest Deduction (SLID) — Improvements made to SLID in 2001 are set to expire this year. If not extended, SLID will be drastically limited by reduced income thresholds and a 5-year limit
• Expanded Coverdell Education Savings Accounts (ESAs) — Expansions to Coverdell ESAs made in 2001 are also set to expire this year. If allowed to expire, Coverdell ESAs will revert to allowing only $500 in tax-free annual contributions (currently $2,000).

Students and parents will be able to take advantage of these benefits when they file taxes in April 2011, but won’t know if they will be able to take advantage of them for the 2011 tax year (when they file in 2012) until Congress makes it clear if they will be extended or not.

In addition, several higher education tax benefits expired in 2009, including:

• The above the-line deduction for qualified tuition and related expenses — Ideally, Congress will permanently extend the American Opportunity Tax Credit, which would eliminate the need for the tuition deduction to apply to undergraduate students in the future.
• The Individual Retirement Account (IRA) Charitable Rollover — helps colleges and universities generate new or increased charitable contributions that can be used in a myriad ways to benefit students, including financial aid.