How Tax Credits Can Help You Pay For College
So you think you've tried every way possible to finance your college education. You've tried scholarships and government grants, you've applied for financial aid, and pleaded with every family member you could and still you find yourself coming up short. It would be a shame not to be able to pursue the education you desire, especially when there are still other ways to help you out of this quagmire. The government has made available a number of tax credits that apply strictly for educational expenses, two of which - The Lifetime Learning Tax Credit and The Hope Tax Credit - are detailed below.
When reviewing the criteria for claiming different tax credit for educational expenses, you'll often encounter the phrase "qualified expenses." What qualifies as a legitimate, claimable expense? In the case of education-related tax credits, that would be tuition and required fees for attending any accredited vocational school, college, or university. Some credits will also consider textbooks and school supplies, student activities fees, and any equipment the institution may require you pay them to provide for you as a condition of enrollment. Educational expenses that don't qualify for these tax credits include room and board, family expenses, and personal living costs.
Either of the two tax credits given as examples below, and more of the education-related tax credits you'll encounter if you do any further research (as suggested at the end of this article) can be claimed by the student him or herself or by anyone (parent, spouse, guardian) who can claim that student as a dependent.
The Lifetime Learning Tax Credit: Here you get 20% of the first $10,000 with a maximum credit of $2,000 per tax return. That means a parent can claim this credit for each of their students in private educational institutions - four siblings in college can earn their parents $8,000 in Lifetime Learning Tax credits, and so on. And remember, you don't have to spend $10,000 or even be a full-time student to qualify. Any year that you or your child take a class that you must pay for privately that can be said to improve job skills and/or applied towards getting a job, you qualify for and can claim that credit.
The Hope Tax Credit: This credit can be claimed for the first two years of a student's undergraduate, vocational, or other post-secondary education. Here you get all of the first $1,000 back and half of the next $1,000 on any educational expenses that qualify, with the maximum a person can receive in a year at $1,500. In order to qualify for this credit, the student must be enrolled in 6 or more credits per semester being claimed and satisfy certain income restrictions. If it's the student's parents who are claiming the credit, they can claim each eligible child on the same return. A couple spending $2,000 or more in qualified expenses on each of four children can claim a $6,000 Hope Tax Credit.
Certain other restrictions to these credits do apply. For starters, any one student can only claim one, but not both, of these two credits in the same year. A parent may, however, claim the Lifetime Credit for one child and the Hope Credit for another (providing they meet eligibility requirements, of course).
Therefore calculate carefully to see which credit would give you the better break in a given year. Chances are the best plan would be to apply for the Hope tax credit the two years you're permitted and claim the Lifetime Learning tax credit all other eligible years.
Another restriction is on students who were convicted of a felony drug charge. Such students are not eligible for the Hope Tax credit, though they can still avail themselves of the Lifetime Learning Tax credit. Any money that you receive back from these credits than then be applied, if you wish, towards furthering your or your children's educations.
To find out more about these and other tax credits available to people pursuing an education, take a look through Publication 970 and Topics for Students both published by the IRS, or discuss your options in detail with your tax advisor.
Kenneth C. Kelly is the President of Strativia, a financial management software development and services company specializing in applications for personal and business use. Strativia is the developer of Budget Forecaster, a sophisticated home budget and personal finance management software package. Website: www.strativia.com. Contact: info@strativia.com.
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