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Education Tax Credits: Hope & Lifetime Learning Credits

Posted By Jim On 01/21/2009 @ 7:57 am In Career | 8 Comments

With the economic slowdown, a lot of people have been thinking about going back to school yet many of them, me and some of my friends included, aren’t aware of the available education tax credits. When I was in college, I was a dependent and my parents claimed the credits. Since graduating, I have been going to graduate school on my employer’s dime so I never had any qualified educational expenses to claim. But if I want to go back to school or take some special training, it definitely benefits me to brush up on the education tax credits.

IRS Publication 790, Tax Benefits for Education [3], is the publication you want to read if you want all to learn about all the tax benefits the government offers for education. It covers everything from the Hope Credit to the Lifetime Learning Credit, from student loan interest deductions to education savings accounts like the Coverdell ESA [4]. For the purposes of this article, I’ll only talk about the Hope and Lifetime Learning Credit, the two education tax credits available to Americans. Since you can only claim one credit, it’s important to select the right one (fortunately, unless you’re paying for your child to go to school, the “correct” one to pick is obvious).

Hope Credit

The Hope Credit is a $1,800 tax credit that covers qualified educational expenses for an eligible student and is only available for the first two years of post-secondary education. The credit pays for 100% of the first $1,200 in qualified educational expenses and then 50% for the second $1,00 in qualified educational expenses.

The phase-out for the Hope Credit is:

Filing Status Lower Limit Upper Limit
2008
Single $48,000 $58,000
Married Filing Jointly $96,000 $116,000
Married Filing Separately not eligible
2009
Single $50,000 $60,000
Married Filing Jointly $100,000 $120,000
Married Filing Separately not eligible

An eligible student, for the Hope Credit, is one that is pursuing an undergraduate degree or other recognized education credential and must be enrolled at least half time for at least one academic period. Additionally, the student has to be you, your spouse, or a dependent and they can’t have claimed in more than one previous year. Finally, there must be no felony drug conviction on the student’s record.

Lifetime Learning Credit

The Lifetime Learning Credit is a tax credit for 20% of the first $10,000 of qualified education expenses you paid for all eligible students, the maximum is $2,000.

The phase-out for the Lifetime Learning Credit is:

Filing Status Lower Limit Upper Limit
2008
Single $48,000 $58,000
Married Filing Jointly $96,000 $116,000
Married Filing Separately not eligible
2009
Single $50,000 $60,000
Married Filing Jointly $100,000 $120,000
Married Filing Separately not eligible

An eligible student, for the Lifetime Learning Credit, is one that is enrolled in one or more courses at an eligible educational institution.

Differences

The main difference between the two are:

  • Credit Limits: Hope Credit offers up to $1,800 per eligible student, whereas the Lifetime Learning Credit offers up to $2,000 per return.
  • Student Eligibility: The Hope Credit is only available during the first two years of post-secondary education and the student has to be pursuing a recognized education credential. With the Lifetime, it’s available for an unlimited number of years and for all types of courses, without any need of the student pursuing a degree. Another is that a felony drug conviction invalidates a student for the Hope Credit, but not the Lifetime learning.

Which Is Better?

The one that gives you more money back! The Hope Credit is better if you happen to have two students both in their first and second years of college. In that particular case, you could potentially get $1,800 per student. Once one of them enters their third year, they are ineligible for the Hope Credit and are only eligible for the Lifetime Learning. Given the choice of one or the other, the obvious answer is to go with the one that gives you more of a credit. If you have over $9,000 of qualified expenses, the Lifetime Learning makes more sense (at $9,000 of expenses, you’d get a $1800 Lifetime Learning Credit, the equivalent of a Hope Credit). What’s nice is that the two are credits, rather than deductions (difference between tax deductions and tax credits [5]), so you see a big impact.

If you’re thinking about going back to school, brush up on these credits because it can save you some of your hard earned money.

(Photo: m00by [6])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/education-tax-credits-hope-lifetime-learning-credits.html

[3] IRS Publication 790, Tax Benefits for Education: http://www.irs.gov/publications/p970/

[4] Coverdell ESA: http://www.fool.com/college/college02.htm

[5] difference between tax deductions and tax credits: http://www.bargaineering.com/articles/tax-credit-vs-tax-deduction.html

[6] m00by: http://www.flickr.com/photos/m00by/2539347606/sizes/m/

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