Tax Benefits for College Education Expenses

It’s tax time again and if you are a student or if you paid qualified education expenses for a dependant student in 2006, it is important to understand what education credits are available for you. The Hope credit and Lifetime learning credits are just two ways you can potentially save hundreds if not thousands of dollars on your tax return.

Hope Credit
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The Hope credit is available for only the first 2 years of eligible expenses paid towards a postsecondary education. You or the person whom you paid qualified education expenses must be considered an eligible student before taking the Hope credit.

Who can claim credit?

1. The student did not have expenses that were used to figure a Hope credit in any 2 earlier years.
2. The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before 2006.
3. For at least one academic year in 2006, the student was enrolled half-time in a program leading to a degree, certificate, or other recognized educational credential.
4. The student was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of 2006.

In the 2006, the maximum Hope credit has been increased from $1500 to $1650. The first $1100 of qualified expenses are credited 100%, with the next $1100 at 50%. The dollar amounts are doubled for students attending an eligible education institution in the Gulf Opportunity Zone.

This credit is phased out beginning at a modified gross income (MAGI) between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return), which has been increased for 2006. You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint return). Refer to chapters 2 and 3 in Publication 970, which can be found on the IRS website at www.irs.gov.

Lifetime Learning Credit
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Unlike the Hope credit, the Lifetime learning credit has no limit as to how many years it may be applied. However, if the student is eligible for both the Hope and Lifetime learning credits, one or the other can be taken, but not both.

Who can claim credit?

You can claim the credit is you meet all three of the requirements below:

1. You paid qualified expenses of higher education.
2. You pay the education expenses of an eligible student.
3. The eligible student is either yourself, spouse or dependant for whom you claim an exemption on your tax return.

Who cannot claim the credit?

1. Your filing status is married filing separately.
2. You are listed as a dependant in the Exemptions section on another person’s tax return (such as your parent’s).
3. Your MAGI is $53,000 or more ($107,000 or more in the case of a joint return).
4. You (or your spouse) was a resident alien for any part of the year and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
5. You can claim the Hope credit or the tuition and fees deduction for the same student.

The maximum amount available for the Lifetime learning credit is $2000 per year for eligible educational expenses. These are defined as tuition and certain related expenses required for enrollment at an eligible institution. The course must be part of a post secondary degree program or taken by the student to acquire or improve job skills.

Note: Information provided about the Lifetime learning credit is as of 2005. There were no changes for the tax year 2006 that I found in my research.

With the cost of a higher education increasing every year, it is important to know when there are ways to alleviate our tax burden. There are many other education deductions that are available instead of or in addition to these credits. Make sure to consult your tax professional or IRS publication 970 for specific information and qualifications.