Tax Credit

The federal government has provided sizable tax credits for students who are seeking higher education. You may be able to save thousands of dollars this year, solely by proving you’re a student in a college or university.

If you are attending an accredited university, your school will send you a 1098-T form at the beginning of each year. This record includes important tax information about your education-related expenses that the school is required to send to both the student and the IRS. Some of the information recorded includes: amounts billed for tuition and other expenses, payments received, student status, and scholarships awarded. Once you receive this information, you will be able to file for tax deductions that could save you up to $2,000, a sizable sum for most students. Take a look at the following tax credits to see how you can save:

Types

There are three tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit, the Hope credit, and the lifetime learning credit.

The Hope Credit and Lifetime Learning Credit provides a tax credit based on a percentage of your qualified college expenses. The American Opportunity credit replaces the Hope credit for 2009 and 2010, and provides a partially refundable credit. Generally, taking a tax credit will provide a greater benefit than a deduction. The education tax credits are calculated on IRS Form 8863.

1. American Opportunity Credit
The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. The tax credit is scheduled to have a limited life span: it will be available only for the years 2009 and 2010, unless Congress decides to extend the credit to other years.

2. Hope Credit
The new American opportunity credit has replaced the Hope credit for most taxpayers. However, a larger Hope credit ($3,600 maximum) is available for students meeting the special rules for the Midwestern disaster areas. In order to claim the Hope credit for 2009, you must:

The Hope Credit is a tax credit for college students in their first two years of college. It provides a tax credit of up to $1,800 on the first $2,400 of college tuition and fees. You can claim the Hope Credit on your tax return if you, your spouse, or your dependent are a first-year or second-year college student, is enrolled at least half-time at an eligible education institution, and you were responsible for paying college expenses.

3. Lifetime Learning Credit
The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the Hope Credit, you need not be enrolled at least half-time. Even if you took only one class, you may take advantage of the Lifetime Learning Credit. There is no limit on the number of years the lifetime learning credit can be claimed for each student.

Eligible Educational Institutions

An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Qualifying Expenses

The Hope credit and Lifetime Learning credit are based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2009 for an academic period beginning in 2009 or in the first 3 months of 2010.

Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Who Can Claim the Education Credits?

If your son or daughter is going to college, and you claim him or her as a dependent, then you can claim the education credits on your tax return. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return. If you pay the college expenses for someone who is not your dependent, you cannot claim any education credits.

Income Limitations on Education Tax Benefits

The amount of the Hope Credit or Lifetime Learning Credit is limited over a phase-out range. If your adjusted gross income is below the phase-out, your credits are not reduced. If your income is in the middle of the phase-out range, your credits will be reduced. If your income exceeds the phase-out range, you are not eligible to claim any education tax credits.

• $48,000 to $58,000 : Single, Head of Household, or Qualifying Widow
• $96,000 to $116,000 : Married Filing Jointly

The full $4,000 deduction is allowed if you earn less than $65,000 (single, head of household, qualifying widow) or less than $130,000 (married filing jointly). The deduction is limited to $2,000 if your income is between $65,000 and $80,000 (unmarried taxpayers) or is between $130,000 and $160,000 (married filing jointly).

No education tax break of any type is allowed for taxpayers who are married but filing separately. Separate filers are not eligible for the Hope Credit, Lifetime Learning Credit, or the tuition and fees deduction.

For more information on the Hope and Lifetime Learning tax credits, and other tax benefits for postsecondary students, go to www.irs.gov. IRS Publication 970, Tax Benefits for Higher Education, which explains these credits and other tax benefits, is available online, or call 1-800-829-1040. TTY callers should
call 1-800-829-4059.

Education Credits Tax Forms and Instructions

• IRS Form 8863
• Publication 970, Tax Benefits for Education