Taxes Made Simple

Tuition and Fees Deduction

• Have a Modified Adjusted Gross Income of less than $80,000 ($160,000 if married filing jointly).
• Not be able to be claimed as a dependent on somebody else’s return.
• Not be married filing separately.

Qualifying Education Expenses

1. Under no circumstances does room and board count as a qualifying education expense.
2. It doesn’t matter whether or not the money used to pay the expenses was obtained with a loan.

Education Credits

As an alternative to taking the tuition and fees deduction for higher education expenses, you may be able to use one of two credits: The Lifetime Learning Credit or the Hope Credit.

Each year, for a given student, you can only use one of the three (the deduction, or one of the two credits). As such, this area is one in which it particularly valuable to know your options so that you can make the best decision.

As with the tuition and fees deduction, you can only claim a credit for higher education expenses paid for yourself, your spouse, or a dependent.

Hope Credit

The Hope Credit (sometimes referred to as the American Opportunity Tax Credit) is available for students—who are enrolled at least “half-time”—in their first four years of postsecondary education. The amount of the credit is the sum of the first $2,000 of qualified education expenses paid for the student, plus 25% of the next $2,000 of qualified expenses. (Note that this means that the maximum credit per student is $2,500 for 2009.)

Your eligibility to claim the Hope Credit begins to decrease as your Modified Adjusted Gross Income exceeds $80,000 for 2009 ($160,000 if married filing jointly). Once your MAGI reaches $90,000 ($180,000 if married filing jointly), you’ll no longer be eligible to use the credit.

In addition to the expenses that can be used when calculating the tuition and fees deduction, expenditures for “course materials” can be used for purposes of calculating the Hope Credit. “Course materials” includes books and supplies needed for a course, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.

Lifetime Learning Credit

The Lifetime Learning Credit is available for any student enrolled in postsecondary education or any employee enrolled in courses to acquire or improve job skills. The amount of the credit is 20% of the first $10,000 of qualified education expenses. (Note that this means that the maximum credit per student is $2,000 for 2009.)

As with the tuition and fees deduction, the only expenses that can be considered when calculating the Lifetime Learning Credit are:

• Tuition and fees
• Other course-related expenses that are required to be paid to the institution as a condition for enrollment or attendance.

Your eligibility to claim the Lifetime Learning Credit begins to decrease as your Modified Adjusted Gross Income exceeds $50,000 for 2009 ($100,000 if married filing jointly). Once your MAGI reaches $60,000 ($120,000 if married filing jointly), you’ll no longer be eligible to use the credit.

Unlike the Hope Credit, there is no limit to the number of years that the Lifetime Learning Credit can be used for a given student. However, the Lifetime Learning Credit can only be claimed for one student per tax return per year.

EXAMPLE: Katie and Alex are siblings. Alex is a freshman in college, and Katie is a senior (in her fifth year of college). With the help of some student loans, their family spends  $10,000 for tuition for each of them for the year.

The family should probably claim the Hope Credit for Alex, because it will allow for a credit of $2,500, as opposed the $2,000 that would be allowed via the Lifetime Learning Credit. Katie, however, is ineligible for the Hope Credit, because she is in her fifth year of college. As a result, the family should probably claim the Lifetime Learning Credit for Katie’s education expenses for that year.

Simple Summary

• If you pay higher education expenses for yourself, your spouse, or a dependent, you can likely deduct up to $4,000 of those expenses per year.
• Students in their first four years of postsecondary education may be eligible to claim the Hope Credit (of up to $2,500 for 2009).
• Students enrolled in postsecondary education may be eligible for the Lifetime Learning Credit (which can be as large as $2,000 in 2009). Only one Lifetime Learning Credit can be claimed per tax return per year.
• For a given student’s expenses, you can only use one of: the Hope Credit, the Lifetime Learning Credit, or the tuition and fees deduction.

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