Tax Credits For Education

College is expensive -- learn how to get back some of the money you spent on tuition and fees with the education credits offered by the IRS.

Higher education is becoming more and more important to the success of an individual in American society. Unfortunately, costs are rising higher and higher every year, but because of the necessity of a college degree in the workplace, most people have no choice but to pay what is asked. However, the government recognizes that post-secondary education is both essential and expensive, and because of this they have established two education credits, the Hope Credit and the Lifetime Learning Credit. If you paid tuition or fees for yourself, your spouse, or for a dependent over the last tax year, you may be eligible for one of these credits.

Although the two credits differ, the expenses which qualify toward taking the credit are the same for both. Generally, qualified expenses include tuition or fees required for enrolment at an accredited post-secondary institution. This does not have to be a traditional university or college - these institutions include vocational schools or any other post-secondary institution that is eligible to participate in federal student financial aid programs. If you aren't sure whether your institution qualifies, simply call the financial aid or administrative office and ask them. Expenses outside of tuition and fees that may count toward the credits include books, supplies, and equipment - but only if these things are required by the school for attendance (for example, certain universities require students to buy a laptop for class, or an art school that requires students to buy certain supplies for a course). Otherwise, they don't count. Other expenses that don't qualify are room and board, insurance, transportation, or any other incidental expenses not mandated by the institution.

The credit you take depends on the eligibility of both the student and the taxpayer, and the two credits have different guidelines concerning these. The Hope Credit, for example, is available for students only until they have completed their first two years of undergraduate education. After this second year, they no longer qualify for the Hope Credit. Furthermore, this credit can only be taken for up to two tax years for each qualifying student, so even if the qualifying student is taking a long time to complete their degree, the tax benefit only counts for the first two tax years in question. Other qualifications include that the student must be enrolled at least half-time in classes for a minimum of one academic period during the year, and must be actively pursuing a degree or certificate. Finally, the student in question must not have been convicted of any federal or state narcotic crime.

An advantage of the Hope Credit is that each eligible student qualifies for up to a $1,500 credit - meaning if you have three children or dependents who all qualify, you can get a credit of up to $4,500. The credit is particularly generous in that claimants can take 100% of the first $1,000 of qualifying expenses, plus 50% of the next $1,000, which makes it ideal for students who attend schools with lower tuition.

The Lifetime Learning Credit varies from the Hope Credit in that there is no time limit for when the credit can be taken (hence the term "lifetime learning"). While the Hope Credit can only be taken for the first two years of schooling for qualified students, you can take the Lifetime Learning Credit indefinitely - this is an advantage for graduate students, continuing education students, and parents whose children are further on in their college careers. This credit is more flexible in other areas than the Hope as well: First, the credit is not tied to the student's workload, so even if the student only took one course the entire year, part of that cost can go toward the credit. Second, the limit for the total return is $2,000 - this may prove an advantage to some who also qualify for the Hope Credit, especially if there is only one student involved, since the limit for a Hope Credit is $1,500.

However, the calculation of the credit is a bit more limiting with the Lifetime Learning Credit. Whereas the Hope Credit allows you to take 100% of your first thousand in expenses, plus 50% of the next thousand, the Lifetime Learning Credit only allows 20% of the first $10,000 you spend, up to a maximum of $2,000 for the entire return, regardless of the number of students who qualify. If you qualify for both credits, this would only be an advantage if you spent more than $7,500 on tuition and fees, and you only had one student who qualified ($7,500 x .2 = $1,500, or the maximum Hope Credit per student).

The amount you can take for both of these credits is tied to your modified adjusted gross income. You can only take these credits if your AGI is less than $52,000 if single, and $105,000 if filing jointly. If you make less than $52,000, but more than $42,000 if you're single, or less than $105,000 but more than $85,000 if you're filing jointly, the amount of the credit is reduced. If you are married filing separately, you can't take the credit at all.

Regardless of which credit you take, they are a huge boon for anybody who has paid tuition or fees to an accredited institution. If you aren't sure which credit you qualify for, or you qualify for both and aren't sure which is best for you, ask a tax professional or see IRS Publication 970.

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