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Fundranker Blog—Education Expenses

Education Expenses

Education expenses can be reported in four different places on your tax return, which naturally creates some confusion on which place benefits you the most. You can take a Hope credit, a Lifetime Learning credit, or a Tuition and Fees deduction for you, your spouse, and your dependents, and you can take a student loan interest deduction, as well. See IRS Publication 970 for more details. First, let’s review how the credits and deductions work:

For 2008, the Hope credit is limited to $2,400 of qualified expenses ($4,800 if the student attended school in a Midwestern disaster area). The Hope credit equals 100% of the first $1,200 ($2,400) and 50% of the second $1,200 ($2,400), for a maximum of $1,800 ($3,600). For 2008, the Hope credit can be claimed for a student who had not completed the first two years of post-secondary education at the beginning of 2008, who was working toward a degree or certificate, who took at least one-half of a normal full-time workload for at least one academic period in 2008, who has never been convicted of a felony for a controlled substance, and for whom a Hope credit was not claimed in more than one prior tax year.

For 2008, the Lifetime Learning credit is limited to $10,000 of qualified expenses for all students together. The Lifetime Learning credit equals 20% (40% if the student attended school in a Midwestern disaster area) of qualified expenses, for a maximum of $2,000 ($4,000). The Lifetime Learning credit can be claimed for an unlimited number of years, and the student does not need to be pursuing a degree or certificate, can take one or more courses, and can have a felony drug conviction.

For 2008, the Tuition and Fees deduction is limited to $2,000 or $4,000 of qualified expenses for you, your spouse, and your dependents together, depending on your income level.

For 2008, the Student Loan Interest deduction is limited to $2,500 of student loan interest expense for you, your spouse, and your dependents together. Each student must have been enrolled at least half-time in a degree program. Student loan interest can be deducted until the loan is payed off. This deduction can be taken in addition to whichever of the Hope credit, the Lifetime Learning credit, or the Tuition and Fees deduction you take for a particular student, so you should always take this deduction.

Now, let’s consider which credit or deduction you should take. You only get to take one of the Hope or the Lifetime Learning credits for a particular student, so if a student meets the qualifications for both, which should you take for that student? If you have two or more students who qualify for the Hope credit, taking the Hope credit for those students maximizes your education credit. If only one student qualifies for the Hope credit, and that student has qualified expenses less than $9,000, take the Hope credit for that student; for qualified expenses of $9,000 to $10,000, take the Lifetime Learning Credit for that student. Of course, if a student does not qualify for the Hope credit, you should take the Lifetime Learning Credit for that student.

As for the Tuition and Fees deduction, it potentially can reduce your tax by a maximum of $1,000 for all students together, and if you take the deduction for a particular student, you can’t take either the Hope or the Lifetime Learning credits for that student. The only reason you should consider the Tuition and Fees deduction in lieu of either of the two credits is that it reduces your AGI, which in turn can affect your itemized deductions and a number of other tax credits for which you may qualify.

Posted 2/26/09 12:49pm ET in Tax Tips

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