Uncle Sam has offered two different alternatives for families trying to cope up with their educational expenses – the hope scholarship and lifetime learning credit. You cannot claim both the credits at the same time. You need to make a selection between them. There are different criteria for eligibility and you need to be careful when making your selection.
Firstly, remember that these are tax credits. They are not deductions, so they lower your tax liability. So whatever taxes you are required to pay on your tax return can be reduced by either of these tax credits. If your tax liability is lower than these tax credits, then you are allowed to use these credits only to the extent of zeroing your tax liability.
Now let us analyze the features of these tax credits to get a better view of their suitability. The hope credit requires you to be enrolled in a school for a minimum of half time for the academic period beginning in that year. In contrast, to claim a lifetime learning credit, there is no such restriction. As long as you are taking the academic course, you are fine. Also the hope credit is available for the first two years of your post-school education while lifetime learning credit can be availed any time in your life.
If a student has felony drug conviction, he/she will not be eligible for hope credit. However such a restriction does not exist for lifetime learning credit. Both these alternatives are not available for people married but filing separately.
For the first two years of your post-school education, you have both the choices. However after that period you can take only lifetime learning credit. If you are in a family where more than two students qualify for these credits, then the family can claim both these credits for different students. You need to provide attention to the income guidelines. Your modified adjusted gross income (MAGI) cannot exceed $58,000 ($116,000 for married filing jointly).
Your educational institution will send you form 1098-T showing the money received or amount billed towards your educational fees. You should receive this form before January 31 for any given year. That should be the basis for your tax credit claim.
The hope credit is available for an amount up to $1,800 and it is on per student basis. However the lifetime learning credit is available as a percentage of your tuition fees. It is limited to 20 per cent of the first $10,000 educational expense for a family for all the eligible students.
Suppose you are a fresher pursuing an undergraduate degree and your educational expenses are only $1,000, then it will be advisable for you to go for the hope credit. It will give you a tax credit of $1,000 while lifetime learning credit would be limited to $200. However in the later years, you don’t have any choice but to take lifetime learning credit.
Chintamani Abhyankar is internet marketer, tax professional and freelance writer. He has done a lot of research on tax systems and is advising people internationally on various aspects of tax planning over last 25 years.
