A Break-Down of the Three Education Credits Available this Tax Season

With taxes due in just 10 days and the recent political debate on how to support higher education, many Americans are left wondering whether there might be anything in this year’s tax form that might help them out.  Several of you have probably heard of the American Opportunity credit, the Hope credit, or the Lifetime Learning credit, but given their differences in eligibility and benefits, we are guessing many Americans are confused about which ones they can take and for which purchases. 

If you want to know all the nitty-gritty about the education credits available to you, check out the IRS publication Tax Benefits for Education (publication 970), chapters 1-4.  Or, if you just want a summary of those 30+ pages, continue reading this post.

First things first, all three credits cover eligible expenses associated with education in an eligible institution.   The eligible expenses vary by credit and may be expanded for students in the Midwestern disaster relief area, but for all three credits, an eligible educational institution has the same definition: institutions eligible for the Federal Student Aid (FSA) program administered by the Department of Education. 

Another element that holds across the board is that you can only claim the credit for a student for which you have also claimed an exemption.  That is, you can claim the credit for your own education – as long as you meet the other requirements – as well as for other people who are claimed as your dependents. 

Now, which credit you can claim will depend on your income and the student’s eligibility.  Keep in mind that you can only claim one credit per student, but, if you are eligible for more than one, you can calculate the one that gives you the most benefit.

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American Opportunity credit

The American Opportunity credit is a new credit that essentially replaces the Hope credit (below) in most cases.

Eligibility

MAGI: full credit for individuals with MAGIs below $80,000 or couples filing jointly with MAGIs below $160,000; phase out on $80,000-90,000 and $160,000-180,000, respectively.

Student status: First 4 years of post-secondary education.  That is, you can only claim the American Opportunity or the Hope credit (below) for a combined 4 tax years per student, as both of these cover the first 4 years of post-secondary education.  The student must be enrolled at least part-time for at least one academic period that began in 2009, and must be pursuing an undergraduate degree, certificate, or other education credential.

Expenses: Tuition, fees, course-related books, supplies and equipment.  Books, supplies, and equipment do not have to be purchased from the academic institution to qualify.  Student-activity fees may also be included if and only if they are required for enrollment or attendance.  Payments must have been made in 2009 for qualifying expenses in 2009 or in the first 3 months of 2010. 

Benefit: up to $2,500 per student (100% of the first $2,000 and 25% of the next $2,000 spent in qualifying educational expenses)

Further information: Up to 40% of the American Opportunity credit is refundable in most cases.  That is, even if you do not owe taxes, you might be able to get up to 40% of the credit refunded to you.

 

Hope credit

For 2009, the Hope credit is primarily aimed at benefiting families with students in Midwestern disaster areas.  If you claim the Hope credit for one student in your income tax form, you cannot claim the American Opportunity credit for any other student.

Eligibility

MAGI: full credit for individuals with MAGIs below $50,000 or couples filing jointly with MAGIs below $100,000; phase out on $50,000-60,000 and $100,000-120,000, respectively

Student: At least one eligible student you are claiming as a dependent must have attended a school in a Midwestern disaster area in 2009, and you cannot claim the American Opportunity credit for any other student.  It is only available for the first 2 years of post-secondary education, and for only 2 tax years per eligible student.  Therefore, you cannot have already claimed the Hope credit for the same student in 2 previous tax years.  Just like the American Opportunity credit, students must be pursuing an undergraduate degree, certificate, or other recognized education credential, and must be enrolled at least half time in at least one academic period that began in 2009.

Expenses: tuition, and only fees and related expenses that are required for attendance.  Note that this is a stricter definition than expenses eligible for the American Opportunity credit.  For the Hope credit, course-related expenses on books, supplies and equipment are only eligible for the credit if they are required for enrollment, regardless of whether they are paid to the university or a third party.  Payments must have been made in 2009 for qualifying expenses in 2009 or in the first 3 months of 2010.

For students in Midwestern disaster areas, “reasonable costs” for room and board are also eligible but cannot be higher than the largest of these two: (a) the cost for room and board as calculated by the educational institution attended or (b) the actual amount charged if the student is living in housing owned or operated by the educational institution.

Benefit: up to $3,600 per student in a Midwestern disaster area (100% of the first $2,400 in qualified education expenses and 50% of the next $2,400), and up to $1,800 for each other student (100% of the first $1,200 and 50% of the next $1,200)

Further information: Unlike the American Opportunity credit, the Hope credit is not refundable.  That is, it can bring your taxes down to zero, but you will not be refunded if you do not have to pay taxes.

  

Lifetime Learning credit

The Lifetime Learning credit is the broadest and most flexible of the 3 credits, but also has the lowest benefit rate.

Eligibility

MAGI: full credit for individuals with MAGIs below $50,000 or couples filing jointly with MAGIs below $100,000; phase out on $50,000-60,000 and $100,000-120,000, respectively

Student: enrolled in post-secondary education or courses to “acquire or improve job skills.”  This does not have to be in pursuit of a degree or other recognized credential, and can be for one or more courses at an academic institution. There is no limit to how many years you can claim the Lifetime Learning credit.

Expenses: just like the Hope credit, eligible expenses are limited to tuition and other expenses required for enrollment.  Fees and expenses for course-related books, supplies and equipment are only eligible if they are required for attendance.  Payments must have been made in 2009 for qualifying expenses in 2009 or in the first 3 months of 2010.

Just like the Hope credit, for the Lifetime Learning credit, “reasonable costs” for room and board for students in the Midwestern disaster area are also eligible, but cannot  be higher than the largest of these two: (a) the cost for room and board as calculated by the educational institution attended or (b) the actual amount charged if the student is living in housing owned or operated by the educational institution.

Benefit: up to $2,000 for most students (20% of first $10,000 in qualified expenses); or up to $4,000 for students in the Midwestern disaster area (40% of first $10,000 in qualified expenses)

Further information: Like the Hope credit, the Lifetime Learning credit is also not refundable.  That is, it can bring your taxes to zero, but if you do not have to pay taxes for 2009, none of the excess of the credit will be refunded to you.

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Note that even academic expenses paid through loans (i.e., disbursed loans paid directly to the academic institution or sent to you and used to pay for eligible expenses) are eligible for the American Opportunity, Hope, or Lifetime Learning credit as long as they meet the other requirements above.

Also, if you have qualifying expenses for more than one student, you can claim the Lifetime Learning credit for one, and either the American Opportunity or the Hope credit for another.  On the other hand, the Hope and the American Opportunities credits cannot be claimed together, even for different students.  That is, you cannot claim the Hope credit for one and the American Opportunity for another.

Higher education has gotten more expensive over the last decade, and, with the recession, families are finding it harder to afford it.  These credits are designed to give you a slight boost, so take advantage of them!  Besides, higher education and procrastination have always gone hand-in-hand – as you struggle to file your taxes by April 15th, make sure to set some time aside to calculate your education tax credit, even if that means an extra late night work and a lot of coffee.

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