Education credits are a great way to counteract the expenses of tuition by lowering your tax burden. However, because you can not claim the credit and use the deductions for tuition and expenses for the same student in the same year, it is important to know which is more beneficial to you. This must be determined on an individual basis.
There are two types of education credits: the Hope Credit and the Lifetime Learning Credit. You may only claim one of the two credits in any given tax year.
Of the two credits, if your qualified education expenses were lower than $7,500, the Hope Credit will typically be the more beneficial to claim. However, you may only claim the Hope Credit for two years on the same student.
You may claim up to $1,500 of qualified expenses on each eligible student. However, the Hope Credit has criteria that must be met that are not required of the Lifetime Learning Credit. One such criterion is that the student must be pursuing a postsecondary degree and may not have been convicted of a drug felony. Also, as with many credits, you may not claim the Hope Credit if you are filing under the married filing separately status.
One of the odd aspects of the Hope Credit is that it generally can not be claimed after the first two years of postsecondary education have been completed. Therefore, it would have to be claimed in the freshman and sophomore years.
For the most part, tuition and expenses are eligible if they are required by an eligible education institution for attendance. An institution is considered eligible if it qualifies for the student aid program through the Department of Education. If you filed a FAFSA for financial aid, you are more than likely covered as far as eligible status is concerned.
In calculating the Hope Credit, you may claim 100% of the first $1,000 dollars paid in eligible expenses and 50% of the next $1,000. You may claim $1,500 on the initial $2,000 of expenses for each student you claim the credit for. However, the amount that can be claimed may be reduced as your modified adjusted gross income increases. You may not claim the credit if your adjusted gross income is over $53,000 per year, or $107,000 if filing jointly.
Lifetime Learning Credit
With the Lifetime Learning Credit, you may claim up to $2,000 in eligible expenses for ALL of the students enrolled in eligible education institutions. This differs from the Hope Credit because the amount is cumulative as opposed to applying to each student. However, the Lifetime Learning Credit may be claimed for any number of years, instead of the two year limit as with a Hope Credit.
The Lifetime Learning Credit is also more lax in it does not require the student to be pursuing a degree or other credential and the felony drug conviction is not applicable. As with the Hope Credit, though, you may not claim the Lifetime Learning Credit if you are married filing separately or if your adjusted gross income is over $53,000, or $107,000 if filing jointly. For those with incomes between $43,000 and $53,000, the amount of the credit is reduced.
Calculating the Lifetime Learning Credit is a little more complicated than the Hope Credit. The amount of the credit is 20% of the first $10,000 spent on qualified education expenses, which totals $2,000 for the year.