The Education Tax Credit And Arra

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If you or your child is a college student or you are going back to school, you may qualify to get credit on your taxes for your expenses.  With the rising cost of college tuition this credit has been one of the most popular credits you could take if you qualified.  However, with the recent passage of the American Reinvestment and Recovery Act (ARRA) more people will be able to benefit from this credit when filing their 2010 taxes in 2011.

            The education tax credit is an umbrella credit, made up of three different credits.  These credits are the Lifetime Learning Credit, the Hope Credit, and the Tuition and Fees deduction.  While the Tuition and Fees deduction is a deduction and not a credit (meaning it reduces your taxable income) it is considered part of the overall Education credit.

            The main change that the ARRA has made to the education credit is that it has expanded the number of people who can claim the Hope Credit in 2009 and 2010.  The full Hope credit is available to those whose adjusted gross income (AGI) is less than $80,000 for an unmarried individual, and less than $100,000 for a couple filing Married Filing Jointly. 

            In addition, the qualified expenses for the Hope credit will include not only tuition but expenses like books and will allow the Hope credit to be used for four years instead of the previous limit of two years. 

            The requirements to claim the Hope credit are simple:

  1. You are the one who pays the expenses
  2. The student is enrolled in a post-secondary institution at least half time
  3. The student is you, your spouse, or dependent.

The Lifetime Learning credit has the same general requirements as the Hope credit but is designed for students who are not in their first four years of college or seeking a degree.  This includes graduate students and students who are taking courses but not intending to get a degree.

The third education tax advantage is the Tuition and Fees deduction.  Since this a deduction and not a credit this will reduce the amount of your taxable income up to $4,000.  Like the Lifetime Learning and Hope credits, the tuition paid must be for higher education.  This deduction will assist you if your income is too high to qualify for the Lifetime Learning or Hope credits. Student related expenses like books and supplies can be included in this deduction as long as the expenses are paid directly to the institution.

While the requirements for the Tuition and Fees deduction are basically the same, the IRS has limited this deduction in a few specific scenarios.  You cannot claim the Tuition and Fees credit if:

  1. You are filing Married Filing Separately
  2. You are a dependent
  3. Your modified adjusted gross income (MAGI) is more than $80,000 for an unmarried individual,$160,000 for Married Filing Jointly (MFJ)

             When deciding which education credit (or deduction) to take, it is important to note one limitation all of them share.  You can only take one credit per student.  For example, if you have three children in college, you can take the Hope credit for one child, the Lifetime Learning credit for the second child, and the Tuition and fees deduction for the third but you cannot take the Hope Credit and Lifetime Learning Credit for one student. 

            In order to determine which credit is more advantageous for your family, you should do the calculations for each credit and compare them or consult a tax specialist.

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