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Tuition Tax Credits

Roxana Hadad

September 05, 2008

Paying for a college education can be financially taxing. Fortunately, the Treasury Department has set up the Hope Scholarship Credit and Lifetime Learning Credit for students and their families. These credits can help soften some of the impact that higher education can have on the family budget.

Tax Credits: How Much Can You Save?

Unlike scholarships that reduce tuition payments or tax deductions that work to reduce your taxable income, tax credits simply reduce the amount of tax you're obligated to pay.

Here's how each of the credits work:

* With the Hope Scholarship Credit, a student or a student's family can deduct 100 percent of the first $1,100 spent on tuition and other qualified expenses, plus 50 percent of the next $1,100, for the first two years of post-secondary education. If you pay $2,000 or more for tuition, you can receive the maximum credit of $1,650.

* With the Lifetime Learning Credit, a student or a student's family can receive a tax credit of up to $2,000 for educational expenses. The amount of the credit is equal to 20 percent of the first $10,000 of tuition and related expenses.

With both credits, the amount of your credit is based on your overall tuition costs. For example, if you are eligible for a Lifetime Learning Credit and paid $2,000 for tuition, you'd receive a $400 credit on your taxes (20 percent of $2,000 equals $400).

Keep in mind that each eligible student can be claimed on only one tax return - so the parents can file for the credit, or the student can file for the credit, but not both.

With both credits, there are limits based upon your family's income. Joint filers with an adjusted gross income between $90,000 and $110,000 and single filers with an adjusted gross income between $45,000 and $55,000 are eligible for reduced credits. Filers with incomes over $110,000 (joint filers) and $55,000 (single filers) are not eligible to claim either credit.

Eligibility for the Hope Credit

The Hope Scholarship Credit gives a tax break for the first two years of college or vocational school. The student or the student's family can claim the Hope tax credit if:

* The student is in the first two years of post-secondary education (usually freshmen and sophomores in college).

* The student is enrolled in a program that leads to a degree, certificate or other recognized educational credential and is taking at least half of the normal full-time workload (i.e., students taking one or two classes that don't lead to a degree aren't eligible).

* The student has no felony conviction for possessing or distributing a controlled substance.

You can claim the Hope Scholarship Credit for your student for two years only. After that, your student is only eligible for the Lifetime Learning Credit.

Eligibility for the Lifetime Learning Credit

The Lifetime Learning Credit also gives tuition-paying families a break. Here's how it differs from the Hope Scholarship Credit:

* With the Lifetime Learning Credit, there is no minimum enrollment (students can be taking only one or two classes), and students needn't be enrolled in a program leading to a degree or certificate. The Lifetime Learning Credit can apply to classes that upgrade job skills as well as academic courses in a degree program.

* The Lifetime Learning Credit applies to all students in all years of their college education.

* Graduate-level work is eligible.

* This credit is based on the total amount of tuition paid, regardless of the number of students.

As long as your student maintains eligibility, there is no limit to the number of years you can claim the lifetime learning credit.

Which Credit to Claim

You can claim either the Hope Scholarship Credit or the Lifetime Learning Credit, but you can't claim both in the same tax year for a single student. You can claim the Hope credit for the first two years of a student's college education and then the Lifetime Learning Credit for later tax years.

If multiple members of a family are currently attending college, you may be able to make use of both credits simultaneously, but special restrictions apply:

* You can apply multiple Hope Scholarship Credits -- that is, one for each eligible student in your family -- provided all eligibility requirements are met. For example, if your family has two children in their first two years of college, you may apply two Hope Scholarship Credits.

* It's a little trickier for the Lifetime Learning Credit. Even if more than one student in a family is eligible for the Lifetime Learning Credit, the maximum you can deduct is $2,000 -- the maximum amount of one Lifetime Learning Credit. That's because this credit is based on the total amount of tuition paid by the household, rather than the number of students in the household.

* And finally, you may apply both for Hope Credits and a Lifetime Learning Credit as long as you're applying on behalf of different students.

For Example

A family has two children enrolled in college, one is a freshman, one a junior. The family can claim a Hope Scholarship Credit for the freshman and a Lifetime Learning Credit for the junior.

But let's complicate matters by adding another sibling who's a senior in college. In this case, the family is still eligible for a Hope Scholarship Credit and only one Lifetime Learning Credit.

One final example: Let's say that a family has four children in college: two freshman, a junior and a senior. Now the family can claim two Hope Scholarship Credits, but still only $2,000 (the maximum deduction) for one Lifetime Learning Credit.

To learn more about the Hope Scholarship and Lifetime Learning Credits check IRS publication 970: Tax Benefits for Education (.pdf), which contains more details about these credits and other available deductions.

Check FinAid's Education Tax Benefits page for more information.

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