Education Planning Articles |
Education Tax Credits
It's tax time, and your kitchen table is littered with papers and forms. As if this isn't bad enough, you recently paid your child's college semester bill, and you don't know where you'll find the money to pay the taxes that you expect to owe. Well, you might finally catch a break. Now that your child is in college, you might qualify for one of two education tax credits – the Hope credit and the Lifetime Learning credit. And because a tax credit is a dollar-for-dollar reduction against taxes owed, it's more favorable than a tax deduction, which simply reduces the total income on which your tax is based.
These education tax credits depend on the amount of qualified tuition and related expenses that you pay in a given year, as well as your modified adjusted gross income (MAGI). In 2007, to qualify for a full credit, your MAGI must be below $47,000 if you're a single filer and $94,000 if you're a joint filer. A partial credit is available for single filers with an MAGI between $47,000 and $57,000 and joint filers with an MAGI between $94,000 and $114,000.
Hope credit can help with college expenses
The Hope credit is a tax credit that covers the first two years of your child's undergraduate education. It also covers the first two years of your or your spouse's undergraduate education. Graduate and professional-level courses aren't eligible. The Hope credit is generally worth a maximum of $1,650. It's calculated as 100 percent of the first $1,100 of tuition and related expenses that you've paid for the year, plus 50 percent of the next $1,100 of such expenses.
To take the credit, both you and your child must clear some hurdles:
- Your child must attend an eligible educational institution as defined by the IRS (generally, any post-secondary school that offers a degree program and is eligible to participate in federal aid programs qualifies).
- Your child must attend college on at least a half-time basis.
- Your child can't have a felony conviction.
- You must claim your child as a dependent on your tax return. If your child has paid the tuition expenses, you can still take the credit as long as you claim your child as a dependent on your return. But if your child has paid the tuition expenses and isn't claimed as a dependent on your return, your child can take the credit on his or her own return.
The Hope credit can be taken for more than one student in the same year, provided each student qualifies independently. So, if you have twins who are in their freshman year of college (and you otherwise meet the requirements), your Hope credit would be worth $3,300. However, there are other restrictions. You can't take both the Hope credit and the Lifetime Learning credit in the same year for the same student. And whatever education expenses you cover with your tax-free distribution from a Coverdell education savings account (formerly known as an education IRA) cannot be the same expenses you use to qualify for the Hope credit.
Lifetime Learning credit can help with college, graduate school, and individual course expenses
The Lifetime Learning credit is a tax credit for the qualified education expenses that you, your spouse, or your child incur for courses taken to improve or acquire job skills (even courses related to sports, games, or hobbies qualify if they meet this requirement!). The Lifetime Learning credit is much less restrictive than the Hope credit. In addition to college expenses, the Lifetime Learning credit covers the tuition expenses of graduate students and students enrolled less than half-time.
The Lifetime Learning credit is generally worth a maximum of $2,000. It's calculated as 20 percent of the first $10,000 of tuition and related expenses that you've paid for the year.
One major difference between the Hope credit and the Lifetime Learning credit is that the Lifetime Learning credit is generally limited to a total of $2,000 per tax return, regardless of the number of students in a family who may qualify in a given year. So if you have twins who are in their senior year of college, your Lifetime Learning credit would be worth $2,000, not $4,000.
As with the Hope credit, if your child withdraws money from a Coverdell ESA in the same year that you claim the Lifetime Learning credit, your Coverdell ESA withdrawal cannot cover the same expenses that you use to qualify for the Lifetime Learning credit.
My child is in college – how do I know which credit to take?
The Hope credit and the Lifetime Learning credit cannot be claimed in the same year for the same student, so you'll need to pick one. If your child is in the third or fourth years of college, you have to take the Lifetime Learning credit – you don't qualify for the Hope credit. And even when your child is in the first or second year of college, it's still best to take the Lifetime Learning credit because it's generally worth $2,000, compared to $1,650 for the Hope credit. The exception to this is if you have another family member who would qualify for the Lifetime Learning credit in that same year. In this case, in the same year you can take the $1,650 Hope credit for the child who is in the first two years of college and the $2,000 Lifetime Learning credit for the other qualifying student.
How do I claim either credit on my tax return?
You should receive Form 1098-T from the college, showing the tuition expenses you've paid for the year. Then, at tax time, you must file Form 8863 to take either credit. If you are married, you must file a joint return to take either credit. For more information, see IRS Publication 970 or consult a tax professional.
