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Paying for College?
Reduce your
taxes by up to $1,500 or more a year!
The HOPE & LIFETIME LEARNING Education Tax Credits
What's a Tax Credit?
A tax credit saves
you more than a deduction. A credit is subtracted directly from your federal
income tax on a dollar-for-dollar basis. A deduction is subtracted from your
income before you calculate your tax, which yields much less than dollar-for-dollar
savings.
Who Claims the Credit?
If someone claims
the student as a dependent for tax purposes, then that person, not the student,
will receive the credit, even if the student files a tax return. Otherwise,
the student will receive the credit.
How Are the Credits Different?
You may claim
the Hope credit for each of the first two tax years of college or vocational
school for classes that lead to a degree or recognized certificate. A student
must be enrolled at least half-time for at least one academic period to qualify
for the Hope credit. The Lifetime Learning credit is available for any higher
education, including graduate and professional school, and unlike the Hope credit,
you may be enrolled less than half-time. A student is eligible for only one
credit each year. For those who qualify for both credits, the Hope credit will
usually save more money.
What Costs Qualify?
Qualified expenses
for both credits include tuition and required fees, minus any tax-free grants
and scholarships. Expenses for books and supplies are not included unless they
are paid to the institution as a condition of enrollment or attendance. Room
and board, insurance, transportation and medical fees (including health fees)
are not qualified expenses, even if they are required for enrollment or attendance.
If you're paying for college or vocational school for yourself or your dependents, two tax credits are available for you--
THE HOPE AND THE LIFETIME LEARNING CREDITS
What the Hope Credit
Is Worth
This credit equals
100 percent of the first $1,000 of qualified expenses, plus 50 percent of the
second $1,000, for a maximum of $1,500. After 2001, the credit may be adjusted
for inflation.
Example: You are enrolled in the first year at a technical school and have an adjusted gross income (AGI) of $20,000. You pay $2,200 in tuition and required fees and receive an $800 tax-free grant, which reduces your qualified expenses to $1,400. You would be eligible for a Hope tax credit of $1,200 (100 percent of the first $1,000 plus 50 percent of $400).
What the Lifetime Learning Credit Is Worth
This credit equals
20 percent of the first $5,000 of qualified expenses, for a maximum of $1,000.
After 2002, the credit will be 20 percent of the first $10,000, for a maximum
of $2,000. It will not be adjusted for inflation.
Example: You and your spouse file jointly and have an AGI of $70,000. Your child is in her third year at a university, and she receives a tax-free scholarship that reduces her qualified expenses to $4,000. You would be eligible for a Lifetime Learning credit of $800 (20 percent of $4,000).
Is There an Income Limit?
Yes.
Single tax filers with up to $40,000 of AGI and joint tax filers with up to
$80,000 of AGI qualify for the full credit. The credits are phased out (gradually
reduced) for single filers in the $40,000 to $50,000 range and for joint filers
in the $80,000 to $100,000 range. If your AGI is greater, the credits are not
available to you. After 200l, the income limits may be adjusted for inflation.
Example: You are a single filer who has an AGI of $45,000 or a joint filer with an AGI of $90,000. In both cases, your tax credit would be reduced by 50 percent, since your AGI exceeds 50 percent of the phase-out range.
A Credit for Each Student
A family with
more than one student may claim a Hope credit for each student who qualifies.
But a family may claim only one Lifetime Learning credit per ear for all the
students in the family who do not receive a Hope credit.
Example: You and
your spouse have three children, all dependents, enrolled in college. The two
younger ones are in their first two years, so each qualifies for a Hope tax
credit. The oldest child is a senior whose expenses are $3,000. Also, you are
in graduate school, and your expenses are $4,000. You and your spouse may claim
only one Lifetime Learning credit for your family. This will cover the first
$5,000 of the $7,000 you pay for your and your oldest child's education, and
will reduce your federal income tax by $1,000 (20 percent of $5,000). This $1,000
adds to the two Hope credits you receive for your younger children.
Its Easy to Claim a Credit!
The school will send the student IRS Form 1098-T, Tuition Payments Statement. If this form does not report the qualified expenses, you can call the school to find out how much you paid.
The person claiming a credit must fill out IRS Form 8863 and attach the form to his or her federal tax return. To get the form, call 1-800-829-3676 or download it from the U.S. Treasury Department's Web site at www.irs.ustreas.gov. Form 8863 is a worksheet that will help calculate the amount of the Hope or Lifetime Learning credit that may be claimed on the return.
Points to Remember
For More Information
Student Financial Assistance
of the U.S. Department of Education produced this guide
We invite you to visit our Web site at www.ed.gov/studentaid
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