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One way to save money on your children’s college and graduate education is to utilize the tax credits available specifically for you.
There are two types of education credits available: the Hope Credit and the Lifetime Learning Credit. Both credits can be deducted from your federal income tax, not just from your taxable income.
The Hope Credit
The Hope Credit is a tax credit of up to $1,650 per student per year. The credit is only applicable to students in their first 2 years of post-secondary education (college or vocational school).
However, the Hope Credit can be taken on all students in a household that fit the criteria. Additionally, in order to qualify for the credit, the student must be enrolled at least half-time for at least 1 academic period.
The Hope Credit tax credit amount is calculated by allowing 100% of the first $1,100 of qualified tuition or other related expenses plus 50% of the next $1,100 of eligible expenses. In order to be eligible, all qualifying expenses must have been paid out during the tax year.
The Lifetime Learning Credit
The Lifetime Learning Credit is a credit of up to $2,000 per year. The tax credit applies to all undergraduate, graduate or professional degree courses. Not only does this apply to college students, but this also applies to adults seeking to improve or expand their job skills.
The Lifetime Learning Credit is calculated by allowing up to 20% of the first $10,000 of eligible expenses (post-secondary tuition and fees), for a potential total credit of $2,000. Each household may only take one Lifetime Learning Credit (per tax year), regardless of how many children are pursuing post-secondary education. Additionally, like the Hope Credit, in order for an expense to eligible, it must have been paid out during the tax year.
About Both The Hope Credit And The Lifetime Learning Credit
Both education tax credits allow for tax savings, however, both tax credits cannot be taken in the same year for the same student. Additionally, the Hope Credit may only be used for 2 years per student. On the other hand, the Lifetime Learning Credit may be used as many years as the student is eligible.
To be eligible for either education tax credit, qualified tuition & fees must have been paid on yourself, your spouse or your dependent. The education credits may be claimed by independent students, but not by students who are claimed as a dependent on someone else’s tax return.
Finally, like most tax credits there is phase-out of the education credits dependent on your income. The phase-out begins when your household income is over $43,000 (single) or $87,000 (married filing jointly) and the education tax credits are completely eliminated when your income is greater than $53,000 (single) or $107,000 (married filing jointly).
Very few people use the words fun and taxes together… and don’t worry, I’m not one of them. I hope to make taxes easier to understand and less of a hassle. I am a CPA with a Master’s in Accounting, and I’ll do my best to help explain many of the tax options available today.