Education Credits

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Married persons must file MFJ to get this credit

Deduction: all college years

• This deduction can substitute either credit on your personal return, calculate the best place to take it.

• If you are taking courses to improve your skills at work or for your business, that is, course work that directly relates to your job or business, then you take all college expenses off on schedule-A, or for your business on the proper form. College is taken as a work expense. All expenses paid for college including mileage, travel, books, fees, tuition, and every other expense is deductible minus employer re-imbursements.

Hope: first two years of college: DISCONTINUED 2010

• Each student must be enrolled at least half-time for at least one academic period which began during the year.

• The student must be free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

American Opportunity Credit: first four years of college

• Each student must be enrolled at least half-time for at least one academic period which began during the year.

• The student must be free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

Lifetime: third year on of college

• The credit applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills, regardless of the number of years in the program.

• If you qualify, your credit equals 20% of the first $10,000 of post-secondary tuition and fees you pay during the year.

Education deduction

• Take this if you do not qualify for the credit

Phase out of credit chart

The following is a direct quote from the IRS

Top Ten facts about the Tuition and Fees Deduction 

The Tuition and Fees deduction of up to $4,000 is available to help parents and students pay for post-secondary education. Below are ten important facts about this deduction every student and parent should know.

1. You do not have to itemize to take the Tuition and Fees deduction. You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or Form 1040A.
2. You may be able to claim qualified tuition and fees expenses as either an adjustment to income, a Hope or Lifetime Learning credit, or – if applicable – as a business expense.
3. You cannot take the tuition and fees deduction on your income tax return if your filing status is married filing separately.
4. You cannot take the deduction if you are claimed, or can be claimed, as a dependent on someone else's return.
5. The deduction is reduced or eliminated if your modified adjusted gross income exceeds certain limits, based on your filing status.
6. You cannot claim the tuition and fees deduction if you or anyone else claims the Hope or Lifetime Learning credit for the same student in the same year.
7. If the educational expenses are also allowable as a business expense, the tuition and fees deduction may be claimed in conjunction with a business expense deduction, but the same expenses cannot be deducted twice.
8. You cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.
9. The same rule applies to expenses you pay with a tax-exempt distribution from a qualified tuition plan, except that you can deduct qualified expenses you pay only with that part of the distribution that is a return of your contribution to the plan.
10. IRS Publication 970, Tax Benefits for Education, can help eligible parents and students understand the special rules that apply and decide which tax break to claim. The publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Form 8863, Education Credits (PDF 82K)
• Publication 970, Tax Benefits for Education (PDF 368K)
• Tax Topic 605

Six Facts About the American Opportunity Tax Credit

Many parents and college students will be able to offset the cost of college over the next two years under the new American Opportunity Tax Credit. This tax credit is part of the American Recovery and Reinvestment Act of 2009.

Here are six important facts the IRS wants you to know about the new American Opportunity Tax Credit:

1. This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course Materials.
2. The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000 per student each year. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.
3. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.
4. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
5. The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.
6. You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, which ever is more beneficial for you.

Complete details on the American Opportunity Tax Credit and other key tax provisions of the Recovery Act are available at the official IRS Web site at IRS.gov/Recovery.

Links:

• Tax Benefits for Education: Information center
• IR-2009-78 Special IRS Web Section Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available
• Publication 970, Tax Benefits for Education
• YouTubeVideo: Education Credits (Parents): English | Spanish | ASL
• Audio File for Podcast: American Opportunity Tax Credit

Last updated: 01/30/2011 12:35:34 PM