If you, your spouse, or your children attended college last year, the money you spent can count towards one of two educational tax credits.
• Describes the two education-related credits
• Lists criteria for hope tax credit and lifetime learning credit.
• Alerts you to tax loopholes that can benefit you
Make claiming tax credits easier
Do your taxes online, for free: H&R Block allows you to work on your return for free, until you file. Work on your federal, state, and small business taxes, and pay nothing until you are satisfied with your return. Start now.
Avoid costly mistakes, and take advantage of all possible credits and deductions. (Claiming tax credits is really easy with H&R Block).
One of two educational tax credits can benefit taxpayers who paid some sort of tuition at a post-secondary learning institution last year:
• The Hope tax credit designed specifically to help meet the costs of the first two years of college, and
• The Lifetime Learning credit which allows all students, along with graduates and professionals, to claim credit for tuition paid at a college and/or for job-related classes.
These two educational tax credits can be somewhat confusing, and there are certain loopholes and exclusions you should know about before proceeding.
If you choose to e-file, the process becomes much more simple, because calculations are completed for you instantly.
In fact, e-filing with H&R Block is the best way to ensure that you claim the maximum amount allowed to you for these educational tax credits, as well as all other tax credits. It's also the best way to make sure that no mistakes are made on your tax return.
Criteria for qualification
To find out if you qualify, take a look at our comparison table. It list the benefits and requirements of both educational tax credits, as they compare to each other. Read through the criteria to determine whether you qualify for the hope tax credit or the lifetime learning credit, or both. If you qualify for both, the hope tax credit is likely to exceed the amount you could claim under the lifetime learning credit, but continue reading to make sure you are making the most beneficial decision.
Before you claim either the hope tax credit or the lifetime learning credit, you need to be aware of the income and filing restrictions that apply to both:
• If you are single your modified income cannot exceed $50,000 (phase-out begins at $82,000
• If you are married filing jointly your modified income cannot exceed $100,000 (phase-out begins at $82,000)
• You cannot claim these credits if you are married and filing separately
• You can claim one of the credits for one student, and one for the other, but you cannot claim both educational tax credits for the same student.
To summarize: These two educational credits are closely related, and often complement each other. Because the Hope tax credit applies only for the first two years, parents (or students,) often claim the Lifetime Learning credit after their eligibility for the Hope tax credit has expired.
However, the Lifetime Learning credit limit applies to the entire tax return, rather than individual students. This means its impact is severely diluted for families with more than one student in school.
Tax loopholes that can benefit you
As we said earlier, educational tax credits do not apply if your income exceeds $100,000 for joint filers and $50,000 for singles.
However, a loophole in the Taxpayer Relief Act of 1997 allows the children of higher-income families to claim the Hope tax credit even if their parent's income makes them ineligible. Rather than be claimed as a dependent on their parents tax return, the student files her own tax return. Since the student's income is likely to be well below her parents, she now qualifies to claim the Hope tax credit, thus "circumventing" the rules.
The result is a lower tax bill for all involved. And the government says it's ok.
One more thing: expenses incurred for required job-related courses are also allowed to be deducted if you itemize your tax deductions.
Although you cannot claim the lifetime learning credit AND deduct the expenses, you should find out which method benefits you the most. If you have a high income, the lifetime learning credit may be unavailable to you, but the expense can always still be deducted.