Tax Credits for Education
The Hope credit and lifetime learning credit are two tax credits available to help pay for college for you, your spouse, or your dependent. A tax credit provides a dollar-for-dollar reduction in the amount of federal income taxes that you owe.
For example, if you owe $2,000 in income taxes and have a $1,000 tax credit, you cut your tax bill in half. In general, you cannot receive a refund for the portion of a tax credit that exceeds the amount of federal income taxes that you paid.
The Hope credit can be used for expenses incurred in the first two years of college, up to $1,800 a year in 2008. The amount of the credit is indexed for inflation.
The lifetime learning credit applies to tuition costs for undergraduates, graduates, and those improving job skills through a training program. In 2008, this credit is 20% of up to $10,000 in qualified expenses, or a maximum of $2,000. Neither the amount of qualified expenses nor the credit amount are indexed for inflation.
The 2001 tax law coordinates the use of these education credits with education savings accounts and qualified state tuition programs (QSTPs). QSTPs include prepaid tuition plans and college savings plans.
You can receive tax-free distributions from education savings accounts or QSTPs without affecting your use of the Hope or lifetime learning credit. The only stipulation is that you don't claim the credit for expenses that you pay with these tax-advantaged accounts. (Distributions from an education savings account or QSTP are excluded from income when calculating the credit.)
You must complete IRS Form 8863: "Education Credits" if you use either credit. To help you calculate your credit, the IRS requires the school that you attend to mail a Form 1098T: "Tuition Payments Statement" by Feb. 1.
Use of the Hope credit and lifetime learning credit phases out at higher incomes. For taxpayers filing a single return in 2008, the tax credits begin to phase out when modified adjusted gross income (MAGI) reaches $48,000. For couples filing a joint return, the credits begin to phase out when income reaches $96,000. These credits phase out completely when income reaches $58,000 for single persons, and $116,000 for married persons filing a joint return.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.