As a follow-up to an earlier post about saving for college, below are some tax incentives that the IRS has in place.
HOPE Credit
A parent may claim the HOPE credit for 100% of the first $1,100 and 50% of the next $1,100 of college tuition and mandatory fees for each dependant child, up to a maximum of $1,650 (TY2007) annual tax credit per child who paid at least $2,200 in qualified education expenses (QEE) for a maximum of two years. This credit phases out for modified adjusted gross incomes (MAGI)between $47,000 and $57,000 for single filers and between $94,000 and $114,000 for a joint return.
Some limitations on the credit, the student must be pursing an undergraduate degree or otherwise recognized education credential and must be enrolled at least half time for at least one academic period. This credit is available to students only after they have completed the first two years of post secondary education, and is available only for two years per student.
Lifetime Learning Credit
The Lifetime Learning Credit can be claimed by a taxpayer for QEE for an eligible student. The IRS defines an eligible student as either yourself, your spouse or a dependent. The credit is 20% of the first $10,000 of QEE, with the maximum credit claimed of $2,000 (TY 2007) per year. This credit phases out for MAGI between $47,000 and $57,000 for single filers and between $94,000 and $114,000 for a joint return.
The advantages of this credit over the HOPE credit are:
- Available for all years of postsecondary education and for courses to acquire or improve job skills.
- Available for an unlimited number of years.
- Student does not need to be pursuing a degree or otherwise recognized education credential.
- Available for one or more courses.
You can be eligible for both the HOPE credit and the Lifetime Learning Credit in a single tax year, but cannot claim both. The IRS indicates that for most tax payers if their total qualified education expenses for a student are more than $8,250, it will generally be in their benefit to claim the lifetime learning credit. Below is a table comparing the two credits.
| Lifetime Learning Credit | Hope Credit |
|---|---|
| Up to $2,000 credit per return | Up to $1,650 credit per eligible student |
| Available for all years of postsecondary education and for courses to acquire or improve job skills | Available ONLY until the first 2 years of post- secondary education are completed |
| Available for an unlimited number of years | Available ONLY for 2 years per eligible student |
| Student does not need to be pursuing a degree or other recognized education credential | Student must be pursuing an undergraduate degree or other recognized education credential |
| Available for one or more courses | Student must be enrolled at least half time for at least one academic period beginning during the year |
| Felony drug conviction rule does not apply | No felony drug conviction on student's record |
Student Loan Interest Deduction
You can claim a deduction for student loan interest payments of $2,500 or the actual interest you paid which ever is less (TY2007). This deduction is phased out for MAGI between $55,000 and $70,000 for single filers and between $110,000 and $140,000 for a joint return. The IRS defines an eligible student as either yourself, your spouse or a dependent and enrolled at least half-time in a degree program. This deduction is available for as long you have the loan. In order to take the deduction the loan must be a qualified student loan used for qualified educational expenses.
Tuition and Fees Deduction
The Tuition and Fees Deduction can be claimed by a taxpayer for QEE for an eligible student. The IRS defines an eligible student as either yourself, your spouse or a dependent. The amount deducted is on a three tiered system:
| IF your filing status is... | AND your MAGI is... | THEN your maximum tuition and fees deduction is... |
| single, head of household, or | not more than $65,000 | $4,000. |
| more than $65,000 but not more than $80,000 | $2,000. | |
| qualifying widow(er) | more than $80,000 | $0. |
| married filing joint return | not more than $130,000 | $4,000. |
| more than $130,000 but not more than $160,000 | $2,000. | |
| more than $160,000 | $0. |
No Double Benefit
For all of these tax incentives, you are not allowed a double benefit. You cannot:
- Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense.
Deduct qualified education expenses for a student on your income tax return if you or anyone else claims a Hope or lifetime learning credit for that same student in the same year.
Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and in chapter 8 (QTP).
Deduct qualified education expenses that have been paid with tax-free interest on U.S. savings bonds (Form 8815). See Figuring the Tax-Free Amount in chapter 10.
Deduct qualified education expenses that have been paid with tax-free scholarship, grant, or employer- provided educational assistance. See the following section on Adjustments to Qualified Education Expenses.
Not a Tax Adviser
All of the tax incentives may seem a little confusing, and they are. But if you spend some time reading through the IRS publication and seek advice from a professional tax advisor, there are some nice benefits that the government allows.
Sources:
http://www.irs.gov/publications/p970/index.html
http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php
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