Education Tax Credits For Higher Education

Is higher education costing you a fortune? There might be a way to help pay for education costs with the help of education tax credits. What are education credits, who is eligible, and why should we take them? Well, let's begin by answering the first part of the question, and work our way towards the end. Education credits are tax credits available for qualified education expenses paid by the taxpayer in the furthering of their education. Qualified education expenses are defined as an expense paid during the tax year for tuition and fees required by an eligible educational institution for student enrollment and attendance. How you pay for these school expenses does not really matter, but what matters is that those expenses are valid. Here are some instances of expenses that are not qualified to help you determine those that are qualified, and how you account for these expenses. Room and board, medical expenses, student health fees, transportation, insurance, personal living expense, course-related books, equipment, supplies, or any non-academic activity or non-credit course are not qualified expenses. What does this leave? Essentially: tuition and fees required for enrollment or attendance at an accredited college, university, vocational or post secondary educational institution.

If you take a tax deduction for education expenses in any other area of the personal tax return, you will not be able to use that expense when figuring a Hope or Lifetime Learning credit.  If you received tax free help, such as a Pell Grant or scholarship, you have to deduct that quantity from your qualified expenses; however, the majority of scholarships and Pell grant monies are taxable, so you might be taxed, but you may also get the tax credit.  If you make any prepayments of tuition, you can use the prepaid amounts on your current year's federal income tax return, on condition that you' have followed all other guidelines. 

Currently, there are two different tax credits available: the Hope credit and the Lifetime Learning credit.  What are their dissimilarities?  Well, first you cannot take them together; you must choose one or the other.  The Hope credit can only be claimed during the first two years of college, as defined by the educational institution, enrolled no less than half time and can't be higher than $1500.  The Lifetime Learning Credit maximum is $2000.  This credit may be used for undergraduate, graduate and professional degrees courses.  It is not based on a student's school workload which means it is allowed for one or more courses at an eligible school.  It can’t be taken in conjunction with the Hope Credit, even if your expense exceeds the Hope Credit limits.  If your expenses are higher than the Hope Credit limitation the first two years, just put the excess on your Schedule A. 

Also, your tax credits are limited by your level of income, and your adjusted gross income totals.  The higher your income the less tax credit you can get.  Credits may be reduced depending on your income level and how you file, i.e.  single, married, etc.  Therefore, when determining these tax credits, you will have take into consideration your current student status, your income levels, and your expense levels because Hope will expire after your second year of higher education.  You could take any excess expense deductions under your itemized deduction expenses on Schedule A, when Hope or Lifetime Learning is at their maximums.  On a side note, you cannot claim either credit for a student named as a dependent on your tax return if you used the Tuition and Fees Adjustment for that same student.  This is why it is always recommended to look for professional tax help. 

Who is eligible for education tax credits?  You're eligible as a taxpayer or eligible dependent of a taxpayer who was enrolled as a student in an eligible educational institution.  If you can be claimed as someone's dependent, they will be able to claim the education credit, not the dependent.  Usually, dependent students' expenses are claimed by their parents or legal guardians.  Now, here is an interesting note: if you're a student, and you can't be claimed as someone's dependent, only you can take the education credit; even if you're not the person paying the expense. 

Why would you take the education credit?  Perhaps a better question should be why would you not take the credit?  In case you haven't noticed, it could be really costly to attend higher education classes.  For anybody seeking to further their education, obtain a degree, and pursue their dream, any federal income tax credit that can be taken, is a helping hand on the road to accomplish that dream.  Nowadays, without furthering your education, you're almost optimistically sentenced to a lifetime of minimum wage earnings, and trying hard to make ends meet.  A college education still remains the fastest route to a better life, better wages, and the achievement of the American Dream.