Education Expenses Equal Tax Credits

There are a number of education related tax benefits available to individuals who are paying higher education costs or repaying student loans. These usually fall into two categories tax deducations or tax credits. In this issue we will take a look at the benefits of using education tax credits.

Education Tax Credits
A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you.

There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the Hope credit and the lifetime learning credit.

Tax Tip: You may be able to take a tuition and fees deduction for your education expenses instead of an Education Tax Credit. You can choose the one that will give you the lower tax.

The Hope Credit
You may be able to claim a Hope Credit of up to $1,500 for qualified tuition and related expenses for each eligible student during that student’s first two years of post-secondary education. An eligible student must be taking at least one-half of the normal full-time workload in order to qualify for the credit.

The Lifetime Learning Credit
You may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. The lifetime learning credit you are allowed may be limited by the amount of your income and the amount of your tax.

Tax Tip: If you are eligible to claim the Hope credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. For 2005, if the total qualified education expenses for a student are less than $7,500, it will generally be to your benefit to claim the Hope credit.

There are several differences between these two credits. For example, you can claim the Hope credit based on the same student's expenses for no more than 2 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between the two credits are summarized in following table.

Hope Credit	Lifetime Learning Credit
Up to $1,500 credit per eligible student	Up to $2,000 credit per return
Available ONLY until the first 2 years of post- secondary education are completed	Available for all years of postsecondary education and for courses to acquire or improve job skills
Available ONLY for 2 years per eligible student	Available for an unlimited number of years
Student must be pursuing an undergraduate degree or other recognized education credential	Student does not need to be pursuing a degree or other recognized education credential
Student must be enrolled at least half time for at least one academic period beginning during the year	Available for one or more courses
No felony drug conviction on student's record	Felony drug conviction rule does not apply

Eligiblity
Generally, you can claim either education tax credit if all three of the following requirements are met.

You pay qualified education expenses of higher education.
You pay the education expenses for an eligible student.
The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Claiming the Credits
You claim the Hope credit by completing Parts I and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 50, or on Form 1040A, line 31.

You claim the lifetime learning credit by completing Parts II and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 50, or Form 1040A, line 31.

Visit the Military.com Tax Center for more information on using this and other credits and deductions to lower your taxes and increase your return.