Two tax credits you should be claiming for college tuition
Two tax credits enable students to offset some of the high costs of further education by reducing their income tax; the Hope credit and the lifetime learning credit. They are not deductions from taxable income and can not create a refund – so they only become important if the family already pays tax.
Hope credit.
The Hope credit is available for undergraduates (and some equivalent courses) in the first two years of college. In 2007 it is worth up to $1650 and is calculated as being available as a straight 100% offset of the first $1100 of expenses and 50% of the next $1100. So if you have spent $2200 on out of pocket education expenses and pay $1650 in tax or more that year you can get the full value of this credit.
There are some fairly strict limits:
• They are only available for each of the first two years of college education
• They are not available to any student convicted of a drug felony
• They start to be phased out if the modified adjusted gross income is over $94,000 for couples and $47,000 for single taxpayers (2007)
• They are completely phased out if the modified adjusted gross income is over $107,000 for couples and $53,000 for single taxpayers (2007)
• Married taxpayers filing separate returns are not eligible for the credit.
• It cannot be claimed if you are claiming a lifetime learning credit for the same student
• The student must be in at least half time education.
Lifetime learning credit
The Lifetime learning credit is available for any education after the secondary stage (high school or high school equivalency), and the student does not need to be pursuing a degree, or studying more than one course in the year. There are also no limits on the year of education – which is good news for junior students and above - and there is no drug felony rule. It can be claimed by any family member who can claim the student as a dependent.
The lifetime learning credit is calculated as 20% of the fees on a flat fee basis. For example at $1500 of fees the claim is $300 and at $10,000 (the maximum) the claim is $2000. It is subject to the same high income phase out as the Hope Credit - the credit starts to be phased out at $94,000 and is fully phased out at $107,000.
As with the Hope credit married taxpayers filing separate returns cannot claim the credit, nor can non-resident aliens or students listed as a dependent on someone else's tax return.
What expenses are not counted?
As these credits are intended to cover tuition expenses there are a number of expenses that do not qualify:
• room and board
• medical expenses including student health fees
• insurance
• transport
There is also a category titled "similar personal, living or family expenses" which is essentially a catch all category. If you feel you are being bold in your deductions then be prepared for some correspondence with the IRS
You should note that you can't have double benefit from claiming either the Hope or lifetime learning credit and also claiming a tax deduction for the same expenditure.
Claiming both credits
If you have two students in full time education, one as either a freshman or sophomore and the other as either junior or senior - it is perfectly possible to claim both credits. The only rule is that you don't claim both credits for the same student.
Also if you have two students in the first and second years you can claim two sets of the Hope credit.
For older and part time students
For those people who are going back into education after some time in the workforce, even if the education is part time, the Lifetime Learning Credit can be a significant money saver.
You can also talk to your employer about sponsoring a course and so get a tax deduction for a business related course. Be careful here, as there are quite strict rules about which courses you can claim; essentially if you're learning a new trade or profession you cannot claim. If you were to ask for a $1000 eligible course to be purchased in lieu of $900 wages your employer would be ahead on payroll taxes and you would gain from the non-taxable remuneration.