Education Credit

In order to help taxpayers cope with the incredible costs of higher education, Congress has created two federal income tax credits for qualifying higher education expenses: the Hope credit and the lifetime learning credit. Both credits reduce regular income tax liability, but if the amount of the credit exceeds the tax liability for the year, the taxpayer is not entitled to a refund.

Who Can Claim an Education Credit

A taxpayer is entitled to an education credit for qualifying higher education expenses paid for himself, his spouse, and any dependent claimed on a tax return. The amount of that credit may be phased out if the modified adjusted gross income shown on the tax return exceeds certain statutory amounts. The credit can not be taken by a married taxpayer who files a separate return or by one who is a claimed as a dependent on someone else's return.

The key to a taxpayer's ability to take an education credit for another individual is the taxpayer's claim of a dependency exemption for that person. If the expenses are paid by a student who is the taxpayer's dependent and the taxpayer claimed an exemption for the dependent, the taxpayer is entitled to a credit for the payments even though the student actually made the payments. If the payments were made directly to the college under a court-approved divorce decree, it is as if the dependent made the payments himself. In addition, if the expenses were paid by a third party directly the to the college, the taxpayer is entitled to an education credit because the Internal Revenue Service considers those payments to have been made by the dependent.

Qualifying Expenses

Tuition and fees required for an eligible student at an eligible institution are considered qualifying expenses. Payments made for books, supplies, and activity fees are eligible expenses if they are paid as a condition of enrolling in the college. On the other hand, the costs of room and board, insurance, medical expenses, and other living expenses are not qualified expenses for the purpose of calculating an education credit.

If a taxpayer claimed another credit for higher education expenses, such as for job-related education, he may not claim an education credit. In addition, expenses paid with tax-free grants or scholarships are not considered qualifying expenses.

Hope Credit

The Hope credit is only available for the first two years of higher education, and a taxpayer may only take advantage of this tax benefit twice for a particular student. In order to eligible, a student must be in his or her first two years of college, must be enrolled in a program leading to a degree, certificate, or other recognized academic credential, must be enrolled at least half-time, and cannot have a drug-related felony conviction.

Lifetime Learning Credit

If a student has completed more than two years of college education or has taken a Hope credit more than two times, he or she (or the taxpayer claiming the student as a dependent) may be eligible for a lifetime learning credit for qualified tuition and expenses. The lifetime learning credit, unlike the Hope credit, does not have a degree or workload requirement, and it is available for graduate education.

Double Benefit?

Not surprisingly, a taxpayer is not allowed to claim both a Hope credit and a lifetime learning credit for the same qualified education expenses.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.