IRS Offers Tax Credits for Education Expenses

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  1. If you earn less than $50,000 per year individually, or $100,000 per year jointly, learn about the deductions you can claim for education expenses.

With the "Pomp and Circumstance" around tax credits for education occuring almost 10 years ago, most working professionals are not aware that they can deduct educational expenses from their income taxes.

Before you continue, these credits are available for individuals with less than $50,000 per year in Adjusted gross income, or $100,000 per year if filing jointly.

In a ceremony at the White House on August 5, 1997, President Clinton signed into law The Taxpayer Relief Act (The Act) providing taxpayers two nonrefundable tax credits for payments made for qualified tuition and related expenses (tuition and fees, but not books) for post-secondary education--the HOPE Scholarship Credit and the Lifetime Learning Credit.

The HOPE Scholarship Credit allows taxpayers to claim a maximum credit of $1,500 (100 percent of the first $1,000 of tuition and fees and 50 percent of the next $1,000 of tuition and fees) for expenses paid on behalf of the taxpayer, the taxpayer's spouse, or a dependent for the first two years of post-secondary education at an eligible institution. The student must be enrolled on at least a half-time basis for at least one academic period during the year for the expenses to be qualified. The HOPE Scholarship Credit applies to expenses paid after December 31, 1997, for education furnished in academic periods beginning after that date.

The Lifetime Learning Credit allows taxpayers to claim a maximum credit equal to 20 percent of up to $5,000 of expenses ($10,000 beginning in 2003) incurred during the taxable year for qualified tuition and fees for eligible students for post-secondary education, including any course of instruction to acquire or improve job skills. The Lifetime Learning Credit applies to expenses paid after June 30, 1998, for education furnished in academic periods beginning after that date.

Both credits limit qualified expenses to the expenses of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer. Additionally, both credits are phased out for taxpayers with modified Adjusted Gross Income between $40,000 and $50,000 (between $80,000 and $100,000 for joint filers). For each qualifying student, taxpayers must choose to claim either the HOPE Scholarship Credit, the Lifetime Learning Credit, or the exclusion for certain distributions from an education IRA for the taxable year. They cannot claim more than one of these benefits for a student for any year.

The Act provides an above-the-line maximum deduction for up to $2,500 of interest paid by taxpayers on qualified education loans. Taxpayers may take a deduction on qualified education loans for the benefit of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred. Deductions are allowed only for the first 60 months that interest payments are required. The deduction is phased out for taxpayers with modified AGI between $40,000 and $55,000 ($60,000 and $75,000 for joint filers). Married taxpayers must file jointly to take the deduction, and the credit may not be claimed on the return of anyone who is claimed as a dependent on another person's return.