If you have a child that will be going to college, it is a good idea to become aware of the various tax credits and deductions that may be available to you. These have been around a while; they include the HOPE Scholarship Credit and the Lifetime Learning Credit created by The Taxpayer Relief Act of 1997, The American Opportunity Credit created by the American Recovery and Reinvestment Act (ARRA) of 2009, and other education tax deductions.
First let’s delineate the basic difference between tax credits and deductions. Credits directly reduce tax, compared to deductions, which reduce the amount of income that is subject to taxation. Usually, credits result in less taxation compared to deductions.
The Hope Scholarship Credit was extended to 2008. Basically, ARRA extended it through 2012 and modified it somewhat. The following are some of the highlights of the Hope Scholarship Credit, also now called The American Opportunity Credit and the Lifetime Learning Credit
- The current HOPE Credit maximum is $2,500, and 40% is refundable. The Lifetime learning credit is 20% of the first $10,000 of eligible expenses, with a maximum non-refundable credit of $2,000.
- You can’t use both the HOPE and the Lifetime Learning Credit for the same student in a year.
- The Hope Credit used to apply for 2 years, but now applies for 4 years. The Lifetime learning credit can apply to all years of post secondary education and other course work, such as to help improve job skills.
- “Married Filing Separately” tax filers are ineligible.
- The Hope Credit is only available to those with certain incomes, and it begins to be reduced when someone’s modified adjusted income (MAGI) exceeds 80,000 ($160,000 joint filers). Once it exceeds $90,000 ($180,000), there is no eligibility. For the Lifetime Learning Credit, the credit maximum begins to be reduced when the MAGI exceeds $51,000 ($102,000 joint); there is no eligibility when the income exceeds $61,000 ($122,000 joint).
- The Hope Credit only applies to tuition and related expenses, including fees, required books, and supplies and equipment; it does not include room and board and personal expenses.
- Those convicted for a felony drug offense are eligible for the Lifetime Learning Credit but not for the HOPE Credit.
Education Tax Deductions
Qualified higher education expenses can be deducted by the person paying the expenses. Double deductions are not permitted, such as deductions taken as business expenses, learning credits, distributions from Coverdale or Section 529 Plans, or those paid with tax-free interest or benefits from savings bonds or from scholarships and grants. The maximum deduction is $4,000 for individuals with Modified Adjusted Gross Incomes (MAGI) of no more than $65,000 ($130,000 joint), and then it is $2,000 with MAGI above those amounts, with no deduction if MAGI is larger than $80,000 ($160,000 joint).
This is just a summary of information to increase your awareness, and it should not be relied upon; rules and limits are subject to change and interpretation. You should seek the advice of qualified tax preparers and refer to documents at irs.gov.
