The Education Tax Credits
by James Chenoweth Since it's March, we have a very topical subject this month, which will practically affect many of you out there. Today's lesson, children, will involve the Hope Scholarship and Lifetime Learning Tax Credits, 26 U.S.C.S. §25A (2003). So, if you haven't done your taxes yet, you are in luck. The form to use to declare these credits is IRS Form 8863. Gather around and enjoy.
If you have an adjusted gross income of less than $50,000 ($100,000 in the case of a joint return), and you have paid for educational expenses (tuition, books, etc.) during the last tax year, you may qualify for both the Lifetime Learning Credit and the Hope Scholarship Credits. This means that you get to decrease your tax obligation by the amount of these credits, making it beneficial to a tax deduction, which only decreases your adjusted gross income. If this doesn't make sense to you, relax. It will be clear soon.
Note that not all schools qualify as schools to which you receive a tax credit for your tuition. Please consult your school, lawyer, or financial advisor to see if your school qualifies before claiming either the Hope or Lifetime Learning Credits.
The Hope Scholarship Credit (26 U.S.C.S. § 25A (b) (2003))
How much is my Hope Credit?
The Hope Credit is a per student credit. It is equal to the sum of: 100% of so much qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any period during that taxable year) not to exceed $1,000, plus 50% of such expenses that exceeds $1,000 but does not exceed $3,000.
Do I Qualify for the Hope Credit?
The Hope Credit is only allowed for 2 taxable years, so after a Joe College Student or his parents have declared this credit for 2 taxable years, all other attempts to claim the credit will be tax evasion with a possible mail fraud tacked on there too. Also, a student may only qualify for the Hope Credit for his first two years of school. That means, if you do not elect to get the Hope Credit by the time you (or your dependent) finish your sophomore year, you never receive it.
Part-time students only qualify if Joe College Student is at least 1/2 time student for a portion of the year. The purpose of this restriction is to prevent you from taking a free class in underwater basket weaving at your neighborhood college after work. For most of you, you have a Joe College Student that is in a full-time curriculum, gone each semester only to be heard from when he needs money. This restriction will not apply to you.
Also, any student that has been convicted of a state or federal drug offense for possession or distribution is ineligible.
The Lifetime Learning Credit (26 U.S.C.S. § 25A (c) (2003))
As opposed to the Hope Scholarship Credit, the Lifetime Learning Credit is for the taxpayer, meaning you may not declare the Lifetime Credit due to your dependant spending your money at school.
How much is my Lifetime Learning Credit?
The Lifetime Learning Credit equals 20% of your tuition and related expenses as not to exceed $10,000. Meaning, you can get a credit of up to $2,000. You may not declare the Lifetime Learning Credit AND the Hope Credit for the same student in the same year. However, if you, the taxpayer, qualify for the Lifetime Learning Credit, and your dependent qualifies for the Hope Credit, you can get both.
Reduction of the Credit for Certain Income Levels
If your modified adjusted gross income (AGI + any deductions you made under § 911, 931, 933 (if you don't know what this means, you probably didn't make any of these deductions)) is less than $40,000 (or you are filing jointly and it is less than $80,000), disregard this section entirely. You qualify for the whole of your tax credit.
If your adjusted gross income is over $50,000, then forget the Hope or the Lifetime Learning Credit. You don't get anything back.
For those of you with adjusted gross income levels between $40,000 and $50,000, your credit will be gradually reduced. To find out the rate of this reduction take your income (ex. $45,000), subtract $40,000 ($5,000), and divide by $10,000 (in our example, 50%). These figures are doubled for married individuals filing jointly (ex. $85,000 - $80,000 = $5,000. Divide $5,000 by $20,000 and you get a 25% haircut).
The justification for this procedure is that higher income earners, Congress said, did not need the tax credit and could afford to send their kids to college. However, because they don't want the scenario where earning one more dollar kills your tax credit entirely, they developed this $10,000 range phase out, gray area.
Conclusion
I hope this has been as good for you as it has been for me. As always, please consult your attorney or financial advisor to see if you qualify for these tax credits. And as always, keep those legal questions coming, and I'll keep trying to answer them. ----------------------
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