Education Tax Credits for Higher Education

Is higher education costing you a fortune?  There may be a way to help pay for those costs with the help of education tax credits.  What are education credits, who is eligible, and why should we take them?  Well, let’s start with the first part of the question, and work our way to the end.  Education credits are tax credits available for qualified education expenses paid by the taxpayer in the furthering of their education.  Qualified education expenses are defined as an expense paid during the tax year for tuition and fees required by an eligible educational institution for student enrollment and attendance.  It really doesn’t matter how you pay these expenses, only that the expenses are valid.  Now, let’s give some examples of expenses that are not qualified so that you can determine those that are qualified, and how you account for these expenses.  Room and board, medical expenses, student health fees, transportation, personal living expense, insurance, course-related books, supplies, equipment, or any non-academic activity or non-credit course are not qualified expenses.  What does this leave? Basically: tuition and fees required for enrollment or attendance at an accredited college, university, vocational or post secondary educational institution.

If you take a tax deduction for education expenses in any other area of the personal tax return, you cannot use that expense when figuring a Hope or Lifetime Learning credit.  If you received tax-free assistance, such as a Pell Grant or scholarship, you must deduct that amount from your qualified expenses; however, most scholarships and Pell grant monies are taxable, so you may be taxed, but you can also get the tax credit.  If you make any prepayments of tuition, you can use the prepaid amounts on your current year’s federal income tax return, provided you have followed all other guidelines.

Now, there are two different tax credits: the Hope credit and the Lifetime Learning credit.  What are their differences?  Well, first you cannot take them jointly; you must choose one or the other.  The Hope credit can only be taken during the first two years of college, as defined by the educational institution, enrolled at least half time and cannot exceed $1500.  The Lifetime Learning Credit maximum for 2005 is $2000.  This credit can be used for undergraduate, graduate and professional degrees courses.  It is not based on a student’s school workload which means it is allowed for one or more courses at an eligible school.  It cannot be taken in conjunction with the Hope Credit, even if your expense exceeds the Hope limitations.  If your expenses exceed the Hope limitation the first two years, simply include the excess on your Schedule A. 
   
Your tax credits are also limited by your level of income, and your adjusted gross income totals.  The higher the income the less tax credit the taxpayer receives.  Credits could be reduced depending on your level of income and how you file, i.e. single, married, etc.  So, when figuring these tax credits, you need to consider your current student status, your income levels, and your expense levels as Hope will expire after your second year of higher education.  You can take any excess expense deductions under your itemized deduction expenses on Schedule A, when Hope or Lifetime Learning is at their maximums.  On a side note, you can not claim either credit for a student named as a dependent on your tax return if you used the Tuition and Fees Adjustment for that same student so it is always advisable to seek professional tax help.

Who is eligible to take these tax credits?  You are eligible as a taxpayer or eligible dependent of a taxpayer that was enrolled as a student in an eligible educational institution.  If you can be claimed as someone’s dependent, they will be able to claim the education credit, not the dependent.  Generally, dependent students’ expenses will be claimed by their parents or legal guardians.  Now, here is an interesting note: if you are a student, and you cannot be claimed as someone’s dependent, only you can take the education credit; even if you are not the person paying the expense.

Why would you take the credit?  I think a better question would be why would you not take the credit?  In case you haven’t noticed, it can be very expensive to attend higher education classes.  For anyone seeking to further their education, receive a degree, and pursue their dream, any federal income tax credit that can be taken, is a helping hand toward achievement of that dream.  Today, without furthering your education, you’re almost positively sentenced to a lifetime of minimum wage earnings, and struggling to make ends meet.  A college education is the fastest route still, to a better life, better wages, and the achievement of the American Dream.

Use Child Tax Credit for Tax Savings

Now, here’s a real tax savings to the individual taxpayer with dependents.  The child tax credit is a direct federal income tax credit based on the number of dependent children in your family. This federal tax credit is available to provide credit to taxpayers with income below certain established levels.   Started in 2003 and going to 2010, the maximum credit per child is $1000 and is first applied to reduce or eliminate the taxpayer’s federal tax liability.  In 2011, the Sunset Provision will decrease the tax credit unless the credit is extended or made permanent. 

How does this federal tax credit work and who qualifies for this credit?  Well, let’s start with the last question first.  Every family with children qualifies, however the federal tax credit phases out when income is above $110,000 for married filing jointly, $75,000 for single, head of household, or widow, and $55,000 for married filing separately.  In addition, the child tax credit might be limited by the amount of income tax you owe as well as any alternative minimum tax you might owe. But like everything else in this world, there are exceptions.  If the amount of your child tax credit is greater than the amount of federal income tax you owe, you may be able to claim a portion or all of the difference as an "additional" Child Tax Credit.  

First exception:  if your earned income exceeds $10,750, you may be able to claim up to 15 percent of that amount.  Second exception:  if you have three or more qualifying dependent children in your family, you may claim up to the amount of Social Security taxes you paid during the year, minus any Earned Income Tax Credit you received. If you qualify under both these exceptions, you receive the greater of the two amounts, up to the difference between your federal tax liability and your regular Child Tax Credit.  You may want to seek a tax professional for help with this credit.

Now, to answer the “how does it work” aspect; the best approach might be to simply break down the requirements, and explain each fully.  The child tax credit is the responsibility of the Internal Revenue Service (IRS), and the credit issuance is determined through the federal tax returns the individual taxpayer completes each year.  Taxpayers must complete either the 1040 or the 1040A and the IRS form 8812.  The IRS will then determine eligibility, and process accordingly; the requirements and limits change each year, so the individual’s eligibility may change each year.

In order to qualify, a family must have earned at least $10,500 in income, and that figure will rise each year, according to inflation.  There must also be at least one qualifying child.  In order to be classified as a “qualifying child”, the child must meet the following requirements: under age 17 of the tax year, claimed on your tax return as a dependent, must pass the relationship test (son, daughter, stepchild, grandchild, brother, sister, foster child, adopted child, etc.), be a US citizen or a resident alien, and have a social security number.

During its original year of inception, many families with qualifying children were mailed an advance federal income tax credit of either $300 or $400 dollars; but they were also told this would reduce their end-of-year tax credit, dollar for dollar. 
The method used for determining the tax credit is fairly simple, and is not difficult to calculate; however, any individual taxpayer with uncertainty should seek the advice and assistance of a tax professional when preparing their federal tax return. 

The credits, as stated earlier are claimed when you complete a 1040 or 1040A and file your returns with the Internal Revenue Service.  Although many individual taxpayers pay for a professional to complete their federal tax returns each year, there are qualified preparers that are available free of charge each year, through the IRS; either way, make sure that you communicate your qualifications for the child tax credit, and check your tax return to see that the credit was applied.  You do not want to let this tax credit slip by.

The child tax credit, along with the Hope and Lifetime Learning credits are a direct means to affect the individual taxpayer’s tax liability and offer some level of tax relief.  This is meant to help parents with the costs associated in raising children, and educating them.  Most often, the child tax credit is a way to alleviate the existing federal tax liability for middle-income taxpayers.  For the extremely low income families, there is often no income tax due, so there is no allowable tax credit.  Although it does not help the poverty level families as a form of federal income tax refund or tax-free income, it does help to alleviate any federal tax liability.  The Earned Income Credit is used by many poverty level or low-income families as a supplement to their earned income.