Resources - Chapter 14 Supplement
Education Tax Credits
The Hope Credit and Lifetime Learning Credit for "qualified tuition and related expenses" provide potential tax savings on higher education costs incurred by you, your dependents or your spouse. The Hope Credit is for the payment of the first two years of tuition and related expenses for an eligible student. The Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. A taxpayer cannot claim both credits for the same student in one year.
In the past, educational expenses related to starting a new career were not tax-deductible. Those costs could only be deducted if they were considered to maintain or improve skills related to your current trade or business. This deduction reduces your taxable income—thus lowering the amount of income tax due. The irs has initiated a program that actually puts money back into your pockets in the form of educational tax credits.
The following information highlights these credits. Please remember that with anything relating to taxes, change is inevitable, so check the irs publications for up-to-date information, and get advice from your accountant.
Several factors influence your ability to take this education credit. For example, you cannot take the education credits if your adjusted gross income on Form 1040, line 38, or Form 1040A, line 22, is (a) $110,000 or more if married and filing jointly, or (b) $55,000 or more if single, head of household, or qualifying widow(er).
The maximum Hope credit a taxpayer may claim is $1,650 per year per student for the first two years of undergraduate education at an "eligible educational institution." The maximum Lifetime Learning credit that may be claimed is $2,000 per year, per taxpayer, for any post-high school education (including graduate-level courses and classes to acquire or improve job skills).
You may ask, "What is an eligible institution?" In general, it's any college, university, vocational school, or other post-secondary educational institution that's currently eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. The educational institution can tell you if it's eligible, although it's always wise to check with the irs.
To take the credit for a tax year, the tuition and related expense have to be paid during that tax year for education received during a semester that starts with that tax year or within three months of the next year. Also note that if you take a deduction for higher education expenses, such as on Schedule A or Schedule C (Form 1040), you cannot use those expenses when figuring your education credits.
What You Can Deduct:
- Expenses for tuition
- Academic fees
What You Can't Deduct:
- Cost of books
- Student activity fees
- Athletic fees
- Insurance expenses
- Medical expenses
- Room and board
- Transportation costs
- Other personal living expenses
Unless courses that involve sports, games or hobbies are part of your degree program, you cannot deduct those expenses either.
What Reduces the Amount You Can Deduct:
- Tax-exempt scholarships
- Certain military benefits
Any other tax-exempt payments other than gifts or bequests.
Other Items to Look Out for:
- You can take the credit to reduce your tax liability to zero but not to get a refund
- The credit cannot be used to reduce the alternative minimum tax (amt)
U.S. irs Tax Benefits for Education