Looking into Your (Financial) Future as You Get Ready for School

As we approach back to school time, many students and families are balking at the prices of supplies, textbooks, computers, and other gear.  But don’t forget that Uncle Sam encourages people to further their education and may have tax breaks waiting for you soon down the line.  Besides the upcoming sales tax holidays in some states, here are two other tax breaks you can get for higher education:

Hope credit: The Hope credit is an income tax credit for qualified tuition and related expenses associated with higher education.  In this case, “qualified tuition and related expenses” are defined as payments made to an eligible educational institution and that are required for attendance (i.e., tuition, any mandatory activity and enrollment fees) as well as course materials needed for a course of study (i.e., books and supplies).  For 2009, the Hope credit has been expanded to cover the first 4 years of post-secondary education on up to $2,500 per student per year for individuals with a modified adjusted gross income (MAGI) of $80,000 ($160,000 if married and filing jointly).  It is phased out for individuals with a MAGI between $80,000 and $90,000 ($160,000 and $180,000 if married and filing jointly).

Lifetime Learning credit:  Just like the Hope credit, the Lifetime Learning credit covers “qualified tuition and related expenses” and is an income tax credit.  However, the Lifetime Learning credit is available for all years of post-secondary education (including graduate studies) and there is no limit to the number of years for which the credit can be claimed.  Also, one does not need to be pursuing a degree or other credential to be eligible for this credit, as it also covers “courses to acquire or improve job skills”.  The credit is slightly smaller – up to $2,000 – and is only available for individuals with a MAGI of up to $60,000 ($120,000 if married and filing jointly; phased out for individuals with a MAGI over $50,000 and couples filing jointly with a MAGI over $100,000).  For each eligible student, you can only claim either the Hope or the Lifetime Learning credit, and you should choose the one that gives you a higher value.  For more information on these credits and on special circumstances for students in Midwestern disaster areas, see this IRS announcement.

As you see yourself putting down a lot of money for college and graduate school, or raking up those student loans, don’t kick yourself if you have not gotten the best deal out there on a set of sheets or if your state does not have a tax holiday.  Compared to these credits that await you when you file your taxes in the spring, that 5% off coupon for a pack of notebooks may look like small change.


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