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Are you footing the costs
of higher education for yourself or your family? Let your Uncle Sam lend a hand.
Two popular tax credits, the Hope
Credit and the Lifetime Learning Credit, can help defray
education expenses for you and your youngsters. And
because they are credits, rather than deductions, they
take a bigger bite out of your tax bill.
A deduction reduces your taxable
income, which can, but is not guaranteed to, reduce
your final tax bill. A credit, however, is subtracted
directly from the final tax you owe.
Hope
credit
The Hope credit is the tax break you should look at
first if you're putting kids through college, as long
as one of those years is as a freshman or sophomore. For 2006 taxes, it has been increased to $1,650 per student, up from $1,500 the previous tax year.
This credit applies only to course-work
costs spent in a student's first two years of higher
education. The schooling can be at a college or vocational
school, as long as the work at the institution leads
to a degree or certification.
Keep in mind that you can only claim
the Hope credit two times for the same student. So if
your son didn't put in quite enough hours at university
to be classified as a junior and you already claimed
the Hope credit for his expenses on two previous tax
returns, you can't use it again to cover his continuing
education costs.
Lifetime
Learning credit
In that case, your next option is the Lifetime Learning
credit. It can be used for undergraduate, graduate and
professional degree courses for anyone.
This means a qualifying course you
took to improve your current job skills or get new work
could be partially paid for by the tax credit.
If you meet Internal Revenue Service guidelines,
you can count $10,000 of your education expenses. If
you have a child also going to college and that child
has eligible expenses, you can count those toward the
$10,000 total, too, since the credit can be applied
to all qualified education expenses in a taxpayer's
family.
These costs, however, don't translate
directly to your tax break. Rather, you get to claim
up to 20 percent of your eligible Lifetime Learning
expenses, which could net you a maximum $2,000 credit.
Credit comparison
This table will help you decide which credit works best for you and your student.
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Limitations
and coordination
To qualify for either credit, you must pay post-secondary
tuition and fees for yourself, your spouse or your dependent.
The credit may be claimed by the parent or the student,
but not by both. If the student was claimed as a dependent,
he or she cannot file for the credit.
Both the Hope and Lifetime Learning credits
are phased out for higher-income taxpayers. The credits
are reduced for single filers with modified adjusted
gross income between $45,000 and $55,000 and for married
taxpayers earning $90,000 to $110,000.
Once you go over the income limit
for your filing status, you cannot take these credits.
And married taxpayers must file a joint return to get
these tax breaks.
You also cannot claim either credit for
a student named as a dependent on your tax return if
you already used the tuition
and fees adjustment for that same student.
However, you can claim the credits even
if you received a distribution from a Coverdell
education savings account or a qualified
tuition program. Just make sure you don't use Coverdell
or tuition account money to pay for the expenses you
use to claim an education credit.
And for each student, you can choose to
claim only one of the credits in a single tax year.
That means you cannot use the Hope credit to pay for
part of your daughter's tuition charges and then claim
the Lifetime Learning break to write off $2,000 more
of her school costs.
But if you pay college expenses for two
or more students in the same year, you can choose to
take credits on a per-student, per-year basis. That
means you can take the Hope credit for your sophomore
daughter and the Lifetime Learning one for your senior
son.
Detailed eligibility guidelines and earning
limits can be found in IRS
Publication 970, Tax Benefits for Higher Education.
Freelance writer Kay Bell writes Bankrate's
tax stories from her home in Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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