Education Tax Benefits
This section describes several tax benefits for educational expenses. Other related programs, such as section 529 plans and Coverdell Education Savings Accounts, can be found in the Saving for College section. The page concerning Education Tax Benefit Coordination is also helpful when you're trying to maximize your benefits from the various education tax benefits. Additional information on these education tax benefits can be found in IRS Publication 970, Tax Benefits for Education (PDF). See also IRS Form 8863 for more information on the Hope Scholarship and Lifetime Learning tax credits.
The Hope Scholarship provides a $1,650 tax credit per student per year for higher education expenses during the first two years of post-secondary education. (The amount increased in 2006. Previously it was up to $1,500. The amount of the Hope Scholarship is increased to $3,300 for Gulf Opportunity Zone Students.) The amount of the credit is 100% of the first $1,100 of qualified tuition and related expenses per student and 50% of the second $1,100 of qualified tuition and related expenses. The taxpayer must list the student as an exemption on their income tax return and the expenses must have been paid by the taxpayer or by the student. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).) Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer.
- The credit is allowed only for the first two tax years of higher education expenses per student. Typically the first tax year will correspond to the fall of the student's freshman year in college, and the second tax year will correspond to the spring of the freshman year and the fall of the sophomore year.
- The student must be enrolled at least half time for at least one academic period that begins during the taxable year.
- The credit is allowed only for the first two years of postsecondary education. It cannot be used if the student already has two years of post-secondary education.
- The credit will be denied for a student convicted of a felony drug offense.
- If the family has multiple students that meet the requirements, then multiple Hope Scholarship Credits may be claimed.
- The credit applies to expenses paid after December 31, 1997.
- The maximum credit per student per year is $1,650.
- You cannot use the Hope Scholarship with the Lifetime Learning tax credit for the same student in the same year, but you can use them for different students' educational expenses in the same year.
- You cannot use the Hope Scholarship and the Tuition & Fees Deduction for the same student in the same year.
- The Hope Scholarship can be used in conjunction with other tax benefits, provided that different education expenses form the basis for each benefit.
- There is an income phaseout for incomes from $45,000 to $55,000 (single filers) and $90,000 to $110,000 (married filing jointly). (These are the 2006 phaseouts. The phaseouts are indexed for inflation.) You cannot use the credit if you are married filing separate returns.
Reprinted with the permission of FinAid. © 2008 by FinAid Page, LLC. All rights reserved.
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