Tax credits: Education tax credits

Education doesn't just make you smarter, it's a smart way for you to save money on taxes. Taxpayers may be eligible for tax credits for expenses they pay for higher education for themselves and their dependent children.

The Hope Scholarship credit
The Hope credit is available to students -- who are enrolled on at least a half-time basis in a degree or certificate program for any portion of the year -- during their first two years of post-secondary education.

This credit can save you money, but it's non-refundable. That means it might reduce your tax to zero but that's the limit. The credit applies only to tuition and fees -- not to books, dormitory costs or other living expenses.

The Hope credit is provided on a per-student basis. And it's phased out if you exceed cerain earning limits.

The Lifetime Learning Credit
The lifetime learning credit lives up to its name. It covers college juniors, seniors, graduate students, adults returning to college, and less than half-time students are eligible.

In fact, even if you're long out of school you can take this credit to help offset the cost of a non-college course you take that's designed to help improve your job skills. Similar to the Hope credit, the Lifetime Learning tax credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance.

The maximum credit is determined on a per-taxpayer (family) basis, regardless of the number of post-secondary students in the family, and is phased out at the same income levels as the Hope Scholarship tax credit.

Families will be able to claim the Lifetime Learning tax credit for some members of their family and the Hope Scholarship tax credit for others who qualify in the same year.

How to claim the credits
You can figure the amount of your education credits by completing Form 8863. Use Part I for the Hope credit and Part II for the lifetime learning credit.

In both parts, you enter the student's name and taxpayer identification number (usually a Social Security number) and the amount of qualified expenses paid during the tax year. You then complete Part III to compute the amount to on your Form 1040 or Form 1040A. (You can't claim this credit if you file Form 1040EZ.) Attach the completed Form 8863 to your tax return.