College Taxes: The Tax Breaks For College Students

There are three available tax breaks for college students: The Hope Scholarship, Lifetime Learning Credits, and the $4,000 deduction.

For college students, there are three different tax breaks to chose from come January. There are two tax credits, The Hope Scholarship and the Lifetime Learning Tax Credit, and one deduction, also known as the $4,000 deduction. You are only allowed one of these tax breaks per student, so it is imperative that you know which one best applies to your own circumstance. Below you will find all three of these tax breaks outlined in greater detail to help guide you as to the correct choice.

One thing to keep in mind when choosing which tax reduction you will use is that more times than not, a tax credit is usually more beneficial to a tax payer than a tax deduction. With a tax credit, the monies are directly subtracted from the taxes you owe, whereas a tax deduction reduced the amount of money that you are actually taxed on. For example, a tax credit of $1,000 dollars would lessen the amount of taxes owed by $1,000 dollars. If you had a tax deduction of $1,000 dollars, it would only lessen your tax liability by approximately 20%, which would amount to $200 dollars.

The Hope Scholarship: This is actually a tax credit, not a scholarship as the name states. In order to be eligible, you must be filing a tax return and owe taxes. Furthermore, the student must be enrolled at least half-time in an eligible degree or certificate program at an eligible school. The student can not have completed the first two years of undergraduate studies. Being convicted of a federal or state drug felony during the tax year in which you are enrolled is also a disqualification of receiving benefits from The Hope Scholarship. There are also income guidelines to receiving this tax credit for college students. You will be unable to claim the Hope Scholarship if your Modified Adjusted Gross Income is $51,000 or more is filing as a single, or more than $103,000 if your filing status is married.



The amount of tax credit received depends on your income, the amount of tuition and other fees that have been paid, the total of other scholarships and allowances that were subtracted from your tuition, and the number of dependents you have. The Hope Scholarship tax credit allows students to claim up to $1,500 a year. As stated above, this tax credit can only be used for two years. This is not a refundable type of credit. In other words, if you owe less in taxes than the amount you receive for The Hope Scholarship you will not receive the difference.

The $4,000 Deduction: In 2004 and 2005, you will be able to deduct up to $4,000 dollars of college tuition and fees, which is up from $3,000 dollars in 2003. The $4,000 deduction is the highest amount allowed, regardless of how many students are in the household. This is what they refer to as an "above-the-line" deduction, meaning that you do not need to itemize in order to claim it. You will not qualify for the full reduction if you are married filing jointly and your Adjusted Gross Income is above $130,000. If filing as a single, you will not qualify for the full reduction if your Adjusted Gross Income exceeds $65,000. If you are married filing jointly and your Adjusted Gross Income is between $130,001 and $160,000, or as a single between $65,001 and $80,000, you will still be able to claim a reduced deduction of up to $2,000. If married, you must be filing jointly to qualify for the $4,000 deduction. Also, if you can be claimed as a dependent on another person's tax return, you will also not qualify. For example, if the student's parents can claim the student as a dependent, but their Adjusted Gross Income disqualifies them for this deduction, the student themselves can not claim it on that basis.

Lifetime Learning Tax Credit: This credit is available to those who file a tax return and owe taxes. This is a tax credit which will apply to the amount of tax owed, but if you own no taxes, or less than the amount of your credit, you will not receive any monetary refund. You will not be able to claim this credit if your Adjusted Gross Income is over $51,000 if filing as a single, or over $103,000 if your filing status is married. The amounts of the tax credit received are gradually reduced for singles whose Adjusted Gross Income falls between $41,000 and $51,000, and if married, between $83,000 and $103,000. Another requirement of the Lifetime Learning Tax Credit includes enrollment in an eligible program leading to an undergraduate or graduate degree, or be enrolled in some sort of program that will teach and/or strengthen applicable job skills.

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