Tax Credits for Higher Education Expenses

There are certain income tax credits available in the U.S. for education expenses. These are called the American Opportunity, the Hope credit, and the Lifetime Opportunity tax credits. Each will be discussed in detail in this article. Remember that tax credits are much more beneficial than tax deductions. If you qualify for a $1000 tax credit, then a full $1000 comes off the amount of tax that is owed. A $1000 tax deduction will result in less tax to be paid, and this

depends on the tax bracket of the taxpayer which is of course determined by income. If a taxpayer is in the 35% bracket, for example, then his $1000 tax deduction will mean he will avoid paying $350 worth of taxes. IRS Form 8863 must be filled out and filed with the individual’s tax return to claim any of these tax credits.

American Opportunity Tax Credit

This is a new credit starting in the 2009 tax year, and it basically extends the benefits of the Hope credit. It is possible to obtain up to $2,500 of tax credits in each year of eligibility. This can be claimed for any students in their first four years of college. Eligible expenses include tuition, enrollment fees, and course related books, supplies and equipment. This credit can only be claimed for only the first four years of undergraduate studies, and the student must be enrolled at least half time in a degree program. The student must not have any drug related felony convictions, and a Hope credit cannot be claimed for another student on the same tax return. In addition, up to $1,000 of the amount can be refunded to the taxpayer. This credit is not available for people with incomes above a certain level. For single taxpayers this credit phases out between the $80,000- 90,000 income level, and for married taxpayers filing jointly the phase-out income level is between $!60,000- 180,000.

Hope Tax Credit

This credit is only available for the first two years of college, and its maximum limit is $1,800 per year. Eligible expenses are for tuition and enrollment expenses. As with the American Opportunity credit, the student must not have any drug related felony convictions and must be enrolled at least half time in a degree program. Certain additional provisions apply for students from Midwestern disaster areas, so check on this if your student is from the Midwest. There are also income restrictions for this credit, and for single taxpayers the amount is $50,000- 60,000, and for joint returns the amount is $100,000- 120,000.

Lifetime Opportunity Tax Credit

This credit can be up to $2,000 or $4,000 for students in Midwestern disaster areas. It includes expenses paid for tuition and other enrollment expenses. The big difference with this credit is that it can be for both undergraduate and graduate expenses, so there is no limit on the number of years for it to be taken. It also applies to courses which help a person acquire or improve job skills. The student does not have to be enrolled in a degree program.

Every student and/or parent of a student should know what tax credits and deductions they qualify for with regard to the education expenses they pay.