Tax Breaks for College: A Guide to Education Tax Credits

Tax Breaks for College: A Guide to Education Tax Credits

Paying for college is a tough task for most of us. Between scholarships and financial aid, the mountain of paperwork can be daunting. Part of the planning process, however, is understand how the IRS can help you pay for college.

What? What has the IRS ever done for me?

The federal government allows two different tax credits, the Hope Credit, and the Lifetime Learning Credit. You can take one or the other, but not both, if you meet certain qualifications. They aren’t deductions, but the money is applied directly to your tax refund (or liability, as the case may be.) You will have to pay for college tuition and books up front, but come April, you will get a portion of the money back as a tax credit, filed on IRS form 8863.

The Hope Tax Credit is the more restrictive of the two. You can take this credit only twice in a student’s lifetime (but can take it on more than one child). Only certain expenses are eligible (the college should send you a From 1098-T), and can be reduced by scholarships or grants. But if you don’t have either, and your income is less than $47,000 ($94,000 if married filing jointly), then you can claim a tax credit of 100% of the first $1100 spent on qualifying expenses, and 50% of the next $1100. Meaning if you spent $2200 on tuition and books, then you get back $1650. A student must attend at least half time status, and while this doesn’t make a dent in a Stanford bill, for the part-time student working and living at home, it is a significant amount. And say no to drugs – a student with a felony drug conviction is ineligible for the Hope Credit.

The Lifetime Learning Tax Credit is less restrictive. It may be taken an unlimited number of times, for any level of education (even yours!), but it caps at $2000 credit per return (not per individual!). The tax credit amount is only 20%, so those in higher income tax brackets may benefit from taking a deduction rather than this credit, but it can apply to those taking even one course, and the felony drug conviction rule is not applicable.

Please consult your tax adviser to discuss your eligibility, and how to take these credits. In this case, at least, the IRS is your friend.