Tax Credit 101: Credits for College Students

Tax Credits for EducationTax Credits for Education

By: Stephanie Hamilton

For most higher education students, the fall semester has come to a close. As the new year and another semester approaches, now is a good time to begin thinking about taxes. Yes… taxes. Students who are filing their own tax returns this year may qualify for higher education tax credits that can significantly reduce your tax burden, or possibly increase your refund. Learning about them now will save you from cramming later and maybe even missing out on some money to which you're entitled.

There are three ways in which you, as a higher education student, may be able to receive tax credits: the Hope Credit, the Lifetime Learning Credit and the American Opportunity Credit. We'll give an overview here, but more detailed information can be found on the IRS website.

The Hope Credit

Beginning in 2009, the Hope credit has been replaced by the American Opportunity Tax Credit, which we'll discuss later. However, students living in a declared Midwestern disaster area are still eligible for the Hope credit. Midwestern disaster areas are located in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. A complete list of counties is available here.

A maximum of $3,600 is available through the Hope credit, which is a credit applied directly to your total amount of tax due, making this a GREAT program. In other words, if you fill out your 2010 tax forms and find that you own $4,000 in taxes, up to $3,600 of that amount could be wiped away with a Hope credit. The available credit is steadily reduced for those making $50,000 to $60,000 a year if filing as a single person. And people with incomes over $60,000 don't qualify.

You qualify for the Hope credit if you paid educational expenses during 2010 at a qualified post-secondary educational institution located in a Midwestern disaster area. "Expenses" include books and other supplies, some room and board, and costs related to accommodating special needs.

The Lifetime Learning Credit

Like the Hope Credit, the Lifetime Learning Credit is applied directly to the amount of taxes you owe for the year. A credit of up to $2,000 is available (up to $4,000 if the student lives in a Midwestern disaster area).

There is no limit on the number of years you can claim a Lifetime Learning Credit. In addition, the student is not required to pursue a degree or other educational distinction in order to qualify. Educational expenses covered under the Lifetime Learning Credit include tuition and other expenses that must be paid when enrolling in a class. Course-related books only qualify if they are required for enrollment in the course or if the student is in a Midwestern disaster area.

American Opportunity Tax Credit

The American Opportunity Tax Credit offers the most generous credit and applies to more education-related expenses than the other two. In addition, income limits are higher.

You can claim up to $2,500 per eligible student (including yourself) if your income (as a single, head of household) is $90,000 or less. You may be eligible for a refund on up to 40 percent of the credit. In other words, if you owe $2,300 in taxes and qualify for the full $2,500 credit, you may be able to receive a $200 refund. The American Opportunity Tax Credit is the only one that allows for refunds.

In order to qualify, a student must be working toward an undergraduate degree or other educational distinction. Only the first four years of post-secondary education qualify for the American Opportunity Tax Credit. Not only can tuition be figured into the credit, but so can course-related books and other supplies, regardless of whether they're required for enrollment.

When choosing one of the tax credits, keep in mind that you can only use one credit each tax year. In other words, if you want the American Opportunity Tax Credit because of the refund, you can't claim the Hope Credit the same year. It's also important to keep in mind that if you're claiming credits for more than one student, you have to use the same credit for all of them.

This is, of course, just a quick overview of your tax deduction and credit options as a student. Consider talking with an accountant or other tax professional before making your final decision. Some of the requirements and calculations can be tricky to sort through.

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