Forfeiting College Education Tax Credits?
What Are You Thinking?!
National Association of Tax Professionals (NATP) Appleton, WI – How many college students or
parents with college-age children don’t fret about money? College is expensive and there is little to
defray the costs for most students. So why do 27 percent of taxpayers fail to claim a tuition
deduction or tax credit on their tax returns? Good question.
A September 2005 report to the Senate Finance Committee issued by the Government
Accountability Office (GAO), stated that 27 percent of all families that were eligible for education
credits or deductions did not claim them. Why? GAO Investigators blame complex rules for tax
returns.
The two education credits, the Hope and the lifetime learning credits, are subject to income limits.
For 2005, education credits are reduced if your modified adjusted gross income (MAGI) is between
$43,000 and $53,000 ($87,000 and $107,000 if married filing jointly.) If your income is above
these amounts, you are not eligible. Additionally, it is important to note that only one person may
claim the credit—the person who claims the student as a dependent on his or her tax return. If you
have more than one student in any given year, you can choose the credit on a per student basis.
Hope Credit
The Hope credit is 100 percent of the first $1,000 and 50 percent of the next $1,000 of qualifying
expenses, with a maximum credit of $1,500 per eligible student. (Some limitations apply.) The
credit is available to students who:
Lifetime Learning Credit
This credit is available for expenses paid after June 30, 1998 for academic periods beginning after
that date. The credit is 20 percent of the first $10,000 of qualifying expenses for all eligible
students in the family, with a maximum credit of $2,000 per family. (Some limitations apply.) The
credit is allowed for:
How do the credits work? You, your spouse, and any other dependent you claim on your tax return
for the year qualify for the Hope or lifetime learning credits if you have qualifying expenses that
include:
Qualifying expenses do not include insurance, medical expenses, room and board, transportation,
or other personal living expenses.
Tuition and Fees Deduction
Another under-claimed tax break is the tuition and fees deduction that can reduce the amount of
income subject to tax by as much as $4,000. Because this deduction adjusts your income, the IRS
taxes less income. Another plus—you do not need to itemize your deductions on IRS Form 1040 to
use this deduction. This deduction may be beneficial to those who cannot take either the Hope or
lifetime learning credit due to income limitations. If your MAGI does not exceed $65,000 ($130,000
if married filing jointly) you can take a maximum deduction of $4,000 per year. If your MAGI is
greater than $65,000 ($130,000), but less than $80,000 ($160,000 if married filing jointly), your
maximum tuition and fees deduction is $2,000. There is no benefit for MAGIs larger than $80,000
($160,000).
You cannot claim any education benefit if:
How do you choose the right credit? The government will not allow the use of both a credit and a
deduction for education, at least not for the same student, and only one credit or tax-free
withdrawal from a Coverdell education savings account is allowed for each student in any tax year.
“Credits are always better (if you are eligible) because they reduce your tax liability dollar for
dollar. A deduction merely reduces your overall income subject to tax. A $4,000 deduction will save
you $600 in tax assuming you are in the 15% tax bracket. A $1,500 credit will save $1,500 in tax.
Most people will use the Hope credit for the first two years and the lifetime learning credit
thereafter,” advises Cindy Hockenberry, enrolled agent and NATP tax information analyst. She
adds, “Those who do not qualify for the credits may qualify for the tuition and fees deduction.”
College is expensive enough. Use the education benefits available to you to defray costs.
What Are You Thinking?!
National Association of Tax Professionals (NATP) Appleton, WI – How many college students or
parents with college-age children don’t fret about money? College is expensive and there is little to
defray the costs for most students. So why do 27 percent of taxpayers fail to claim a tuition
deduction or tax credit on their tax returns? Good question.
A September 2005 report to the Senate Finance Committee issued by the Government
Accountability Office (GAO), stated that 27 percent of all families that were eligible for education
credits or deductions did not claim them. Why? GAO Investigators blame complex rules for tax
returns.
The two education credits, the Hope and the lifetime learning credits, are subject to income limits.
For 2005, education credits are reduced if your modified adjusted gross income (MAGI) is between
$43,000 and $53,000 ($87,000 and $107,000 if married filing jointly.) If your income is above
these amounts, you are not eligible. Additionally, it is important to note that only one person may
claim the credit—the person who claims the student as a dependent on his or her tax return. If you
have more than one student in any given year, you can choose the credit on a per student basis.
Hope Credit
The Hope credit is 100 percent of the first $1,000 and 50 percent of the next $1,000 of qualifying
expenses, with a maximum credit of $1,500 per eligible student. (Some limitations apply.) The
credit is available to students who:
- Have not completed the first two years of post-secondary education at the start of the tax
year. - Have enrolled in a degree or certification in an eligible educational institution at least half-
time. - Have paid expenses after December 31, 1997 for academic periods beginning after that
date. - Have not been convicted of a felony in connection with a controlled substance.
Lifetime Learning Credit
This credit is available for expenses paid after June 30, 1998 for academic periods beginning after
that date. The credit is 20 percent of the first $10,000 of qualifying expenses for all eligible
students in the family, with a maximum credit of $2,000 per family. (Some limitations apply.) The
credit is allowed for:
- One or more courses taken by the student during the year.
- Any and all post-secondary education including graduate courses, for any number of years.
How do the credits work? You, your spouse, and any other dependent you claim on your tax return
for the year qualify for the Hope or lifetime learning credits if you have qualifying expenses that
include:
- Amounts spent for qualified tuition and related expenses required for enrollment or
attendance at an eligible educational institution. - Fees for course-related books, supplies, equipment, and student activity fees if they are a
condition of enrollment or attendance.
Qualifying expenses do not include insurance, medical expenses, room and board, transportation,
or other personal living expenses.
Tuition and Fees Deduction
Another under-claimed tax break is the tuition and fees deduction that can reduce the amount of
income subject to tax by as much as $4,000. Because this deduction adjusts your income, the IRS
taxes less income. Another plus—you do not need to itemize your deductions on IRS Form 1040 to
use this deduction. This deduction may be beneficial to those who cannot take either the Hope or
lifetime learning credit due to income limitations. If your MAGI does not exceed $65,000 ($130,000
if married filing jointly) you can take a maximum deduction of $4,000 per year. If your MAGI is
greater than $65,000 ($130,000), but less than $80,000 ($160,000 if married filing jointly), your
maximum tuition and fees deduction is $2,000. There is no benefit for MAGIs larger than $80,000
($160,000).
You cannot claim any education benefit if:
- You claim a deduction elsewhere for the same amount (i.e. a business expense);
- You pay qualified expenses with tax-fee funds such as scholarships, grants, employer or VA
assistance benefits (unless the student waives the tax-free treatment); or - There is a tax-free withdrawal from a Coverdell education savings account in any year in
which the proceeds pay for the same education expenses used in claiming the education
credit.
How do you choose the right credit? The government will not allow the use of both a credit and a
deduction for education, at least not for the same student, and only one credit or tax-free
withdrawal from a Coverdell education savings account is allowed for each student in any tax year.
“Credits are always better (if you are eligible) because they reduce your tax liability dollar for
dollar. A deduction merely reduces your overall income subject to tax. A $4,000 deduction will save
you $600 in tax assuming you are in the 15% tax bracket. A $1,500 credit will save $1,500 in tax.
Most people will use the Hope credit for the first two years and the lifetime learning credit
thereafter,” advises Cindy Hockenberry, enrolled agent and NATP tax information analyst. She
adds, “Those who do not qualify for the credits may qualify for the tuition and fees deduction.”
College is expensive enough. Use the education benefits available to you to defray costs.
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