Welcome Tax Relief 101 , a series of articles I plan on writing that will help you take advantage of the some tax breaks many folks don’t know very much about. I will churn up the tax manuals and give you a summary that will make sense to normal people and not just number crunchers. You can see the whole collection under the category of Tax Relief 101 .
There are two types of education credits available: Hope Credit and Lifetime Learning Credit. Everyone in your tax family (you, spouse, dependents) can claim either of the credits but not both. How much credit you receive depends on what you’ve paid for “qualified tuition and related expenses” (which we will discuss later) and your modified adjusted gross income (mAGI).
“Qualified Tuition and Related Expenses”
Qualified – tuition and fees required for attendence/enrollment (to an institution eligible to participate in the Dept. of Education’s student aid program, i.e. if you have doubts, it probably isn’t eligible). Books, supplies, and equipment if necessary for attendence. Finally, student activities fees if they must be paid for attendence/enrollment.
Example: A student activities fee for usage of campus facilities is valid if all students must pay. A fee for student tickets to sporting events are not valid because it is optional.
Now we’ve covered who is eligible (people in your family) and what they are expenses eligible (they basically must pass the smell test), let’s investigate the specifics of either.
Hope Credit: Each student is only allowed to claim this credit twice (two years) and allows for $1,500 of benefits (structured as 100% of the first $1,000, 50% of the next $1,000; so you will need to spend $2,000 for full benefits). It is also phased out if your mAGI is between $42k and $52k and completely gone if your mAGI is above $52k. There are additional rules for eligibility:
1. Hasn’t completely two years of post high school work (ie. not a junior or senior).
2. Was enrolled in a “recognized educational credential” for at least an academic period.
3. Going to school at least half time.
4. Free of conviction for any drug charge (felony possession/distribution at the federal or state level)
Lifetime Learning Credit: So Hope is for the first two years, Lifetime is for the rest of your life. It’s 20% of the first $10,000 paid for all eligible learners in your family. The eligibility requirements are looser (you don’t need to be going half-time to a school giving our real degrees) and you can claim it as many years as you want. One downside is that the credit is reduced if your mAGI is between $42k and $52k.
I hope this has opened up your mind a little to look at other tax breaks if you don’t qualify for either of the Hope or Lifetime credits. Check back again soon for discussions of other financially beneficial tax breaks.
IRS Publication 970  – This is IRS document we summarized. It’s pretty readable but we’ve boiled down the generalities in this article.