Available Education Credits
There are 2 credits allowed for higher education: the Hope Credit and the Lifetime Learning Credit. You can claim the credits for eligible expenses paid on behalf of yourself, your spouse or a dependent for whom you can claim an exemption.
Hope Credit — The credit is allowed for the first 2 years of college. It may not be claimed for more than 2 years, and the student must be enrolled in at least half of a full-time load in a degree program. Plus, the student can't be convicted of felony possession of a controlled substance.
Am I eligible?
If your dependent child plans to attend college, you can claim the Hope Credit if he or she is:
You can't claim the Hope Credit if:
How much Hope Credit can I claim?
As an eligible individual, you may claim the Hope Credit for 100% of the first $1,100 and 50% of the next $1,100 of qualified expenses, which include tuition, fees and required books. Because this is a per-student limit, not a per-return limit, the maximum Hope Credit you can claim for 2007 is $1,650 for each eligible student claimed on your tax return. Your credit amount will be reduced if your MAGI is between $47,000 and $57,000 (between $94,000 and $114,000 if Married Filing Jointly).
Hope Credit Tips
Lifetime Learning Credit — This can be claimed for any number of years. The number of hours the student is enrolled isn't a factor for the Lifetime Learning Credit.
Am I eligible?
Unlike the Hope Credit, which can be claimed only during the first 2 academic years, you may claim the Lifetime Learning Credit for qualifying courses at the undergraduate, graduate or professional level. Your MAGI must be $57,000 ($114,000 if Married Filing Jointly) or less to claim the full credit. You can't claim the credit if you're Married Filing Separately.
How much Lifetime Learning Credit can I claim?
Whether you attend an eligible institution on a full- or part-time basis, the credit is 20% of the first $10,000 (up to $2,000 per return) you pay for eligible students in your family. The amount of your credit is reduced if your MAGI is between $47,000 and $57,000 (between $94,000 and $114,000 if you're Married Filing Jointly). You may use the credit on a yearly basis, and it can even be applied to expenses you pay during 2007 for an academic period that begins in the first 3 months of 2008.
Lifetime Learning Credit Tips
What is an eligible institution?
Any accredited public, non-profit, or private college, university, vocational school, or other postsecondary institution eligible to participate in a student aid program will qualify. Talk to the admissions department to find out if it's eligible.
Eligible Expenses
Required tuition and fees paid during the year for your enrollment at an eligible educational institution qualifies as an eligible expense. The tuition may be paid by cash, check, credit card or with money borrowed. Eligible benefits must be reduced by nontaxable education benefits received during the year, such as tax-free scholarships and tax-free education assistance provided by an employer.
The following items aren't considered eligible expenses:
Claiming the Credits
The Hope Credit is a credit of up to $1,650 per student per year. The Lifetime Learning Credit is a credit of up to $2,000 per return per year. Both credits are claimed on Form 8863, which should be filed with your Form 1040.
Tuition and Fees Deduction
The Tuition and Fees Deduction, a deduction of up to $4,000 for qualified tuition and fees, may provide a larger tax benefit than an education credit. Figure both the credit and the allowable deduction and claim the one that provides the larger tax benefit. Because it's taken as an adjustment to your income, you don't have to itemize to take it. To claim the deduction, your MAGI must be less than $80,000 ($160,000 if Married Filing Jointly). If your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if Married Filing Jointly), the deduction is limited to $2,000. Keep in mind, those who are Married Filing Separately can't claim this deduction.
Student Loan Interest
You may be able to deduct up to $2,500 of interest payments on a qualified student loan if your modified adjusted gross income (MAGI) is less than $70,000 ($140,000 if Married Filing Jointly). You can't deduct student loan interest if someone else claims you as a dependent or if you're Married Filing Separately. For the Student Loan Interest Deduction, you are a dependent even if you aren't claimed as a dependent because you file a joint return, the person who would be eligible to claim you is a dependent of another taxpayer, or if you would be a qualifying relative and your gross income is $3,400 or more.
A qualified student loan is one that is taken out only to pay for qualified education expenses at an eligible educational institution. An eligible educational institution (college, university, vocational school or other post-secondary institution) is one that is eligible to participate in a student aid program administered by the Department of Education. Contact the institution for information as to whether it qualifies.
Qualified education expenses include tuition and fees, certain room and board expenses, books, supplies, equipment, and other necessary expenses. Qualified education expenses must be reduced by the amount paid for them with tax-free educational benefits, such as the exclusion for Savings Bond interest for taxpayers with qualified higher education expenses, tax-free scholarships, tax-free employer-provided education benefits, and tax-free distributions from a Coverdell ESA or qualified tuition plan.
The loan can't be from a related person or made under a qualified employer plan. You can deduct the interest only if you are legally required to make payments on the loan.
The student must be enrolled at least half-time in a program leading to a degree or other recognized educational credential.
You can't claim the deduction for student loan interest if a deduction for the interest would be allowed under another rule (for example, under the rules for home mortgage interest).
The Student Loan Interest Deduction is taken as an adjustment to income, so you can claim this deduction even if you don't itemize deductions on Schedule A (Form 1040).
Work-related Education and Employer-provided Educational Assistance
You may be able to deduct the cost of qualifying work-related education as a business expense if you weren't reimbursed by your employer or if the cost exceeded your reimbursement. You can claim the deduction only if you itemize deductions. The deduction is one of the deductions subject to the 2% of adjusted gross income floor. The education must also meet one of these criteria:
If the education is needed solely to meet the minimum educational requirements of your present job, or will qualify you for a new trade or career, you can't deduct the educational expenses. Tuition and fees you can't deduct because they don't meet the requirements may be deductible as part of the tuition and fees deduction discussed below. It's generally better to claim the tuition and fees deduction.
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. Payments in excess of $5,250 are taxable unless the payment qualifies as a working condition fringe benefit. The payment will qualify under this provision if you could deduct the education if you paid for it. Benefits include payments for tuition, fees, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. To qualify, the plan must be written. Your employer will include the taxable amount (if any) in your W-2 wages.
Tuition and Fees Deduction
If your MAGI is less than $65,000 ($130,000 if Married Filing Jointly), you can deduct up to $4,000 of eligible tuition and fees. If your MAGI is between $65,000 and $130,000 ($130,000 and $160,000 if Married Filing Jointly), you can deduct up to $2,000 of eligible tuition and fees. If your MAGI is more than $80,000 ($160,000 or more if Married Filing Jointly) you can't claim the tuition and fees deduction.
You can't claim the deduction if you're Married Filing Separately, if another person can claim you as a dependent, or if you were a nonresident alien for any part of the year (unless you elect to be treated as a resident alien).
You can claim the tuition and fees deduction or an education credit, but not both. Choose the benefit that results in the larger tax savings. You can't use expenses used to figure this deduction when figuring the exclusion for savings bonds interest (discussed above) or the exclusion for distribution from a Coverdell ESA or QTP. You also must reduce the expenses used to figure this deduction by the amount of tax-free scholarships and nontaxable employer-provided educational assistance you received.
Recordkeeping
You need to keep records of any deduction claimed on your tax return. Examples of what you should keep:
Coverdell ESA
The total contributions for the designated beneficiary (someone 18 or younger or who has special needs) of this account can't be more than $2,000 in any year, no matter how many accounts have been established.
Contributions aren't deductible, but distributions are tax-free as long as they don't exceed the amount of qualified education expenses, such as tuition, books and fees. The amount of qualified education expenses must be reduced by nontaxable education benefits received, such as tax-free employer-provided educational assistance, tax-free scholarships and veterans’ educational assistance. Taxable distributions generally are subject to a 10% penalty.
The $2,000 limit is reduced if the contributor's modified adjusted gross income (MAGI) is more than $95,000 ($190,000 if Married Filing Jointly). No contribution can be made if the contributor's MAGI is $110,000 or more ($220,000 or more if Married Filing Jointly). Excess contributions are subject to a 6% penalty.
You can make a contribution to a Coverdell ESA until the due date of the return (not including extensions) for the year for which you are making the contribution.
Eligible educational institutions include education in any public, private or religious school that provides elementary or secondary education, and any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education.
The Hope and Lifetime Learning Credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits.
You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary. You can also change the designated beneficiary of a Coverdell ESA to another member of your family.
If there's a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it must be distributed within 30 days, unless you change the designated beneficiary of the ESA to another family member who is younger than 18 or who has special needs.
Establishing QTPs
With QTPs, you're either prepaying or contributing to an account established for paying a student's qualified higher education expenses. QTPs can be established and maintained by a state or an agency or instrumentality of the state. QTPs can also be established and maintained by one or more eligible educational institutions only for prepaying qualified higher education expenses.Taxable distributions generally are subject to a 10% penalty.
The Hope and Lifetime Learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP as long as the same expenses aren't used for both benefits.
You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary.
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