The smart way to spend your college fund |
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The Lifetime Learning Credit can be used for undergraduate,
graduate and professional degree courses for anyone. If you meet
Internal Revenue Service guidelines, you could get a maximum $2,000
credit per year.
To qualify for either credit, you must pay post-secondary
tuition and fees for yourself, your spouse or your dependent, but
you can only claim one credit per student each tax year. 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.
Married taxpayers must file a joint return to get
these tax breaks.
Both the Hope and Lifetime Learning credits are phased
out for higher-income taxpayers. If your adjusted gross income is
between $42,000 and $52,000 on a single return, you will qualify
for reduced credit. Income over $52,000 will disqualify you. When
filing jointly, income between $85,000 and $105,000 will get you
reduced credit, and in excess of that a disqualification. In each
category, if your income is below the minimum, you'll qualify for
the full credit.
Detailed eligibility guidelines and earning limits
can be found in "IRS
Publication 970, Tax Benefits for Higher Education."
With a Hope Credit, you can claim the full $1,500
for each eligible student for whom you paid at least $2,000 of qualified
expenses.
The maximum amount of a Lifetime Learning Credit is
$2,000 per year. That $2,000 credit is equal to 20 percent of the
first $10,000 of qualified tuition and education expenses you paid
for all eligible students in a year. Someone who paid $4,000 of
qualified tuition and education expenses could claim an $800 credit
on their next tax return.
Credits and savings don't mix
Here's the tricky thing about these credits. Money from
Coverdell education savings accounts, 529 college savings plans
and prepaid tuition plans cannot be applied to these credits.
The reason? You're already getting tax-free withdrawals
from these accounts when you use the money to pay for college.
You can't have your tax-free withdrawal and a tax
credit, too -- not on the same dollar anyway.
To claim a Hope Credit, you'd have to pay for at least
$2,000 of qualifying education expenses with money from an account
other than a Coverdell, 529 savings plan or prepaid tuition plan.
To claim a full Lifetime Learning Credit, you'd have
to pay for at least $10,000 of qualifying education expenses with
money from an account other than a Coverdell, 529 savings plan or
prepaid tuition plan.
By doing so, you can enjoy tax-free withdrawals from
these accounts plus a hefty tax credit to boot.
Cash a bond, get a tax break
Parents who cash in qualified U.S. savings bonds to pay
college tuition bills may qualify for a tax break as well.
The interest
on the bonds is tax-free if your 2005 income is less than $121,850
(projected at the time of this update) on a joint return and $76,200
(projected) on a single return.
Be sure to keep good records. You'll want to make
note of when the bonds are cashed and when the money from the bonds
is spent on college tuition and fees.
You won't qualify for this tax break if the
savings bonds are in the student's name. And you can't claim a Hope
or Lifetime Learning Credit on money cashed from these bonds if
you're already getting a tax break on the bonds.
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