EDUCATION TAX CREDITS- The American Opportunity credit (modified HOPE) provides a refundable tax credit of up to $2,500 for the cost of undergraduate college tuition and other related expenses. You’ll need to spend at least $4,000 in a single year to get the full credit. The credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly. Forty percent of the credit is refundable, which benefits low-income students paying their way through school (who may owe no federal income taxes).
- The Lifetime Learning Credit provides a tax credit of up to $2,000 for any level of college education (even graduate school), and doesn't require a minimum level of enrollment. However, the Lifetime Learning Credit has a narrower income range compared to the tuition deduction. For single filers in 2012, the credit begins to get reduced starting at a $52,000 income level, and disappears entirely at $62,000. For joint filers in 2012, these limitation numbers begin at $104,000 and end at $124,000.
A new provision in the tax laws took hold in 1998, to help foster higher education. This part of the Taxpayer Relief Act of 1997 involves two related tax credits: The HOPE scholarship credit, and the Lifetime Learning credit. These credits are one part of the new "Education Trilogy" package that was recently enacted. The other two parts are the Education IRA and the Student loan interest deductibility.
All three of these enactments are designed primarily to help low and middle income families deal with the costs of higher education. In regard to the HOPE and Lifetime Learning credits, taxpayers will be eligible for a direct credit against their federal income taxes per year for higher educational expenses paid on behalf of a qualifying student. A brief rundown of these two credits follows.
HOPE Scholarship Credit (old law)
Beginning with expenses paid after December 31, 1997, this is a credit for the first two years of a higher educational program. The expenses must be for tuition and related fees for the taxpayer, taxpayer's spouse, or taxpayer's qualified dependent.
Beginning with expenses paid after December 31, 1997, this is a credit for the first two years of a higher educational program. The expenses must be for tuition and related fees for the taxpayer, taxpayer's spouse, or taxpayer's qualified dependent.
The credit can be up to $1,500 per year for the first two years, based on a percentage formula equal to the sum of 100% of the first $1,000 of tuition plus 50% of the next $1,000 in tuition. So, to get the full $1,500 credit, you would have to pay at least $2,000 in qualified tuition expenses.
American Opportunity (modified HOPE) Tax Credit
The HOPE education credit was renamed the American Opportunity Tax Credit in 2009. The credit is worth up to $2,500 on the first $4,000 of qualifying educational expenses, which will include course materials as well as tuition. The credit now applies to all four years of undergraduate college education, not just the first two years of college as under the previous HOPE credit. The credit is also available to more taxpayers than the previous HOPE credit, with a new phase-out range of $80,000 to $90,000 (or $160,000 to $180,00 for joint filers). Up to 40% of the credit is refundable.
What is the American Opportunity Tax Credit? ($2,500 max credit per year per student)
The American Opportunity Tax Credit is a federal tax credit for college tuition, fees, books, and supplies paid during the tax year for yourself, your spouse, or a dependent. The credit applies to the first four years of post-secondary education.
The credit equals 100% of the first $2000, and 25% of the next $2000 that you paid, up to a maximum of $2500 per year per student. Forty percent of the credit is refundable, allowing families with little or no tax liability to get a refund payment of up to $1000 per student.
The American Opportunity Tax Credit is part of the American Recovery and Reinvestment Act of 2009 (Economic Stimulus Plan). It replaces the Hope Credit for tax years 2009 through 2012.
Is the American Opportunity Tax Credit the same as the Hope Credit?
The American Opportunity Tax Credit, part of the 2009 Economic Stimulus Plan, expanded, increased, and replaced the Hope Credit for tax years 2009 and 2010, and has been extended for tax years 2011 and 2012. Some people refer to the American Opportunity Credit as the Hope Credit.
Compared to the Hope Credit, the American Opportunity Credit:
Lifetime Learning Credit ($2,000 max credit per year per family)
The HOPE education credit was renamed the American Opportunity Tax Credit in 2009. The credit is worth up to $2,500 on the first $4,000 of qualifying educational expenses, which will include course materials as well as tuition. The credit now applies to all four years of undergraduate college education, not just the first two years of college as under the previous HOPE credit. The credit is also available to more taxpayers than the previous HOPE credit, with a new phase-out range of $80,000 to $90,000 (or $160,000 to $180,00 for joint filers). Up to 40% of the credit is refundable.
What is the American Opportunity Tax Credit? ($2,500 max credit per year per student)
The American Opportunity Tax Credit is a federal tax credit for college tuition, fees, books, and supplies paid during the tax year for yourself, your spouse, or a dependent. The credit applies to the first four years of post-secondary education.
The credit equals 100% of the first $2000, and 25% of the next $2000 that you paid, up to a maximum of $2500 per year per student. Forty percent of the credit is refundable, allowing families with little or no tax liability to get a refund payment of up to $1000 per student.
The American Opportunity Tax Credit is part of the American Recovery and Reinvestment Act of 2009 (Economic Stimulus Plan). It replaces the Hope Credit for tax years 2009 through 2012.
Is the American Opportunity Tax Credit the same as the Hope Credit?
The American Opportunity Tax Credit, part of the 2009 Economic Stimulus Plan, expanded, increased, and replaced the Hope Credit for tax years 2009 and 2010, and has been extended for tax years 2011 and 2012. Some people refer to the American Opportunity Credit as the Hope Credit.
Compared to the Hope Credit, the American Opportunity Credit:
- has higher income limits
- increases the tax credit to a maximum of $2500 (vs $1800 for the Hope Credit)
- can be used for the first four years of college instead of only the first two years
- allows credit for required books and supplies in addition to tuition and fees
- is 40% refundable
Congress pegged this supplemental credit to go into effect as of July 1, 1998. Originally, this was a 20% credit on a maximum of $5,000 of annual educational expenses for post-secondary schooling to improve or achieve job-related skills. This maximum educational expense amount became $10,000 by the year 2003. This translates into a $2,000 maximum credit against one's income taxes. It is for an unlimited number of years, so it can be used for graduate school programs as well.
What is the Lifetime Learning Credit?
The Lifetime Learning Credit is a federal tax credit for qualified education expenses paid during the tax year for yourself, your spouse, or a dependent. The credit applies to full-time or part-time post-secondary education, including undergraduate, graduate, and professional study.What is the Lifetime Learning Credit?
The credit equals 20% of the first $10,000 that you paid for all family members, up to a maximum of $2000 per year per family. The credit is not refundable, meaning that you will not get a refund payment if your credit is more than what you owe in taxes.
The Lifetime Learning Credit is one of two federal tax credits that help families offset the costs of post-secondary education. You cannot claim both
credits for the same student in the same year.
How The Two Credits Interract
Basically, the law says you cannot claim BOTH a HOPE and a Lifetime Learning credit for the same student during the same year. You must choose one or the other.
Some Limitations And Caveats
There are four major ways in which these credits may be reduced or totally eliminated for a taxpayer.
First, there is a phase out limitation based on your modified adjusted gross income (AGI). Lifetime Learning Credit for single filers in 2012, begins to get reduced starting at a $52,000 income level, and disappears entirely at $62,000. For joint filers in 2012, these limitation numbers begin at $104,000 and end at $124,000. American Opportunity credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly. Forty percent of the credit is refundable.
Second, these credits are reduced by scholarships, grants, and other tax free educational assistance programs the student receives.
Third, you can't take either of the credits in any year that you withdraw money from the new Education IRA plan to pay for the same educational expenses.
Fourth, if you cash in certain Series EE Bonds to pay for the educational expenses, and you take the credits, the interest from these bonds may not be exempt from tax. So you may have to choose between taking the credits or exempting the bond interest.
These credits are definitely a strong statement from the Federal Government to support higher learning. For low to middle income taxpayers, they can make a positive difference in the "bottom line" when it comes to educational expenses.
Deducting interest on student loans. Students often take out loans to pay for college expenses. Interest on student loans may be deductible up to $2,500 per year. Be aware that this deduction is gradually phased out as your income raises. This deduction may change after 2012 to provide that interest is deductible only for the first 60 months of repayment. Like the tuition deduction, the student loan interest deduction is taken directly on your tax return and doesn't need to be itemized.
Reference: Practice Enhancers, Able & Co., Education Credits – Federal Tax Guide • 1040.com – File Your ...
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