Education Credits
Before discussing the credits, make a brief review of the material discussed in Chapter 4, Adjustments to Income and Chapter 5, Standard and Itemized Deductions of this text. Individual taxpayers have several opportunities for deducting educational expenses on a tax return, including:
Deducting student loan interest as an adjustment.
Deducting tuition and fees as an adjustment.
Deducting tuition, fees, and other expenses as a self-employed taxpayer.
Deducting tuition, fees, and other expenses paid by an employee as a miscellaneous itemized deduction.
Taking a Hope or lifetime learning tax credit.
The Hope creditHope creditCredit allowed for qualifying educational expenses during first two years of college; maximum credit in 2008 is $1,800 per student per year. and lifetime learning credit are available to help qualifying low- and middle-income individuals defray the cost of higher education. The credits are for qualifying tuition and related expenses incurred by students pursuing degrees or vocational training. Room, board, and book costs are not qualifying expenses.
The Hope Credit is 100% of the first $1,200 of tuition and fees paid and 50% of the next $1,200, for a total annual credit of $1,800 per student. This credit is available for the first two years of post-secondary education. Tuition and fees required to attend any institution eligible to participate in U.S. Department of Education student aid programs qualify for the credit. The Hope credit is nonrefundable, which means it can reduce tax liability to zero, but the taxpayer will not receive a refund if the credit exceeds the tax liability.
Tuition and fees expenses that qualify for the Hope credit can be paid on behalf of the taxpayer, his or her spouse, or dependents. The student must carry at least one-half the normal course load for one term during the tax year to qualify for the credit. In addition, the Hope credit is not available for any student convicted of a federal or state drug felony.
Example
Deanna graduates from high school in June. She enrolled at National University in the fall with a 15 unit course load. National University considers students who take twelve or more units full-time. Deanna’s parents paid her tuition and fees of $3,700. Her parents can take a Hope credit of $1,800 = [(100% × $1,200) + (50% × $1,200)].
Qualifying tuition expenses must be paid during the tax year for an academic year beginning during that tax year. If tuition expenses are paid during the tax year for an academic period beginning during the first three months of the following tax year, the expenses may be claimed during the payment year.
The lifetime learning creditlifetime learning creditCredit allowed for qualifying educational expenses; maximum is $2,000 per student per year. is a nonrefundable tax credit of 20% of tuition and fees up to $10,000, for a maximum total credit of $2,000 per year. The credit is available for expenses paid for education of the taxpayer, his or her spouse, or dependents. The credit is available for undergraduate, graduate, or professional courses at eligible educational institutions. The student can be enrolled less than half-time and still get the credit. The purpose of this credit is to encourage taxpayers to take courses at eligible institutions to acquire or improve job skills.
Example
In September, Daisy pays $1,600 to take a course to improve her job skills to qualify for a new position at work. Her lifetime learning credit is $320 (20% × $1,600).
The Hope credit and the lifetime learning credit are phased out for modified adjusted gross incomes between $96,000 and $116,000 on joint tax returns and between $48,000 and $58,000 on other tax returns. For a married taxpayer, the phaseout is calculated by multiplying the total credit amount by [(modified AGI[10] − $96,000)/$20,000]. For single taxpayers, the $96,000 is replaced by $48,000 and the $20,000 is replaced by $10,000 in this formula.
Example
Deb is a single mother with a modified AGI of $50,000. She pays $4,000 in qualified tuition for her son, who just started at State University of New York–Albany. Without any limitations, Deb is entitled to a maximum Hope credit of $1,800 = (100% of $1,200 plus 50% of $1,200) for her son’s educational expenses. However, after applying the modified AGI limitations, the Hope credit is reduced by $360 [$1,800 × ($50,000 − $48,000)/$10,000], resulting in a credit of $1,440.
An alternative way of computing the credit is to compute the amount of credit still available, instead of computing the amount of the reduction and subtracting from the maximum. To compute, use the top end of the phaseout range and subtract the modified AGI and divide by the total phaseout range. In the previous example, the amount of the deduction is computed as follows:
In addition to income limitations, the use of the Hope and lifetime learning credits is limited in the following situations:
Married taxpayers who don’t file joint returns may not claim the credits.
Expenses paid for room, board, and books do not qualify.
Expenses paid for nonacademic fees or for expenses that aren’t related to the student’s course of instruction do not qualify. Also, expenses for courses that involve sports, games, and hobbies don’t qualify for the credit unless the course is part of a degree program.
Qualified educational expenses must be reduced by tax free scholarships or employer reimbursements received by students before calculating credits. However, expenses paid from a gift or inheritance (which is tax free) do qualify for credits.
The credits cannot be used for expenses that are deducted from taxable income on a tax return for education costs (e.g., unreimbursed job-related educational expenses). Students claimed as dependents of other taxpayers are not eligible for educational credits. The persons who claim the students as dependents can claim the educational credit.
Go to Publication 17 and read Chapter 35: Education Credits.
Questions
The Hope credit is 100% of the first $______ of tuition and fees paid and 50% of the next $______.
$550; $550
$1,100; $1,100
$1,200; $1,200
$1,100; $5,500
None of the above
Erika graduates from high school in June. In the fall she enrolls for six units at Liberty College. Liberty College classifies students with twelve or more units as being full time. Erika’s mother pays her tuition and fees of $2,500 for the fall semester and prepays $2,500 for the spring semester. The Hope credit for Erika is:
$5,000
$2,500
$2,200
$1,800
Some other amount
In September, Gerda paid $2,400 to take a course to improve her job skills to qualify for a new position at work. Her lifetime learning credit is:
$240
$360
$480
$2,400
Some other amount
In November, Hans pays $6,200 to take a course to improve his job skills to qualify for a new position at work. Hans’s employer reimbursed him for the cost of the course. Hans’s lifetime learning credit is:
$0
$620
$1,240
$6,200
Some other amount
Inge has modified AGI this tax year of $49,000. In the same year she paid $4,000 in qualified tuition for her dependent son, who just started attending Park University. What is Inge’s Hope credit?
$1,800
$1,785
$1,620
$180
Some other amount
Ingrid has modified AGI this tax year of $54,000. In the same year, she paid $5,000 in qualified tuition for her dependent son who, just started at University of Missouri. What is Ingrid’s Hope credit?
$1,800
$1,485
$1,180
$720
Some other amount
Irene, a sophomore, works part-time and pays $1,600 of her college tuition expenses. Although Irene files her own tax return, her parents claim her as a dependent on their tax return. Irene’s parents have modified AGI of $50,000. What is the amount of Hope credit her parents can claim on their tax return for the tuition Irene paid?
$0
$800
$1,350
$1,800
Some other amount
[10] Modified AGI equals regular AGI reduced by foreign earned income exclusion, foreign housing exclusion, income exclusion of American Samoa residents and exclusion of income from Puerto Rico.
