Jun 19, 2008

Higher Education Tax Credits

There are two different education tax credits available to individuals and families, the Hope Credit and the Lifetime Learning Credit.

The Hope Credit is available to the student who is a freshman or sophomore as of the first school day of the year. The credit is based on the amount of tuition paid. Generally, the cost of books and room and board do not affect the credit. This credit is equal to 100% of the first $1,100 of tuition paid plus 50% of the next $1,100 of tuition for a maximum credit of $1,650 per year. It usually results in a larger tax benefit than the Lifetime Learning Credit but has some limitations.

The credit may generally only be taken in two tax years per qualifying student. The student must be at least a half-time student. He or she also must be pursuing a degree or certificate program. It could be a 4-year traditional degree or shorter certification program such as licensed nursing, cosmetology, or even truck driving. The student must not have been convicted of a drug-related felony.

If the student is a dependent child, it is the parent claiming the exemption who will receive the benefit of the credit regardless of who actually paid the tuition. This is a particularly important factor when divorced parents decide who will be paying the college tuition of their children. For example, if one parent is paying the tuition but the dependent child is being claimed by the other parent, it is the parent who claims the child who will be eligible for the credit, not the one paying the tuition.

The Lifetime Learning Credit is available to anyone who is broadening his or her horizons through education that could improve current job skills or prepare for a new occupation. The credit is allowed whether you are taking one class or a full course load. The credit is based on the tuition paid, just like the Hope Credit. This credit is equal to 20% of the tuition paid with a maximum credit of $2,000 per year. If you are pursuing a 4-year degree, two years of the Hope Credit followed by an unlimited number of years of the Lifetime Learning Credit will provide a little extra help in paying those college bills.

Both credits have an income limitation when qualifying for the credit. Classes must be taken at an accredited institution. Generally, any educational institution eligible to offer federal financial aid will qualify. When determining the appropriate credit, the tuition must be reduced by scholarships, GI bill, and other non-taxable grants.

1 responses:

Is June 19, 2008 at 7:53 PM  

Just thought that it would be useful information to go along with the article.

Income limits for both tax credits:
Married couples filing jointly get the full credit on AGI up to $80,000, phasing out at $100,000. Singles get full credit on incomes up to $40,000, phasing out at $50,000. Credits are claimed on IRS Form 8863.

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