Education Guide Number 4 [text only]

Tax Credits for Education

If you, your spouse, and/or a dependent are currently taking college courses or other post- secondary training, you may benefit from two federal tax relief programs. The Hope Credit and Lifetime Learning Credit, both part of the Taxpayer Relief Act of 1997, were signed into law in the summer of 1998. These tax credit programs can reduce the amount of federal income tax you may have to pay.

Hope Credit

For students in the first two years of college or other post-secondary training (enrolled on at least a half-time basis), taxpayers will be eligible for a tax credit equal to:

• 100% of the first $1,100 of tuition and fees and
• 50% of the second $1,100, up to a maximum credit of $1,650

This means that you can claim the full $1,650 for each student for whom you pay at least $2,200 in qualified expenses. The credit may be reduced based on your modified adjusted gross income. The credit is available on a per-student basis for tuition and fees (less student aid) paid for college enrollment. The credit can be claimed in two taxable years, but not beyond the year you (or your dependent) complete the first two years of college. If it takes more than two years to complete your Associate Degree, you can only claim the Hope Credit during the first two years of taking courses. You can, however, claim the remaining years under the Lifetime Learning Credit incentive.

Example 1: If you paid $800 in tuition and you are expecting a federal tax refund of $250 before you include your Hope Credit, your refund will now be $1,050 (100% of your first $1,100 = $800 plus $250 = $1,050).

Example 2: If you paid $1,400 in tuition, and you are expecting a federal tax refund of $300 before you include your Hope Credit, your refund will now be $300 plus $1,100 (100% of your first $1,100) plus $150 (50% of any part of your next $1,100 or 50% of $300) = $1,550.

Lifetime Learning Credit

This credit is for students pursuing their education beyond their first two years, or for students continuing their education on less than a half-time basis, including working Americans pursuing lifelong learning to upgrade their skills. For expenses paid after January 1, 2006, you may be able to claim a lifetime learning credit equal to 20% of qualified tuition and related expenses paid, to a maximum of $2,000 during that tax year, for all students in the family enrolled in eligible institutions.

As of January 1, 2003, you may claim the 20% credit on a maximum of $10,000 tuition and eligible expenses for all eligible students per family. You can claim the Lifetime Learning Credit even if you are only taking one course. Also, there is no limit on the number of years for which the credit can be claimed for each eligible student.

Example 3: If you paid $500 in tuition and you are expecting a federal tax refund of $250 before you include your Lifetime Learning Credit, your refund will now be $350 (20% of $500 = $100 plus $250 = $350).

Rules that Apply to Hope and Lifetime Learning Credits

Eligibility

You, your spouse, or your dependents are eligible if enrolled at an eligible educational institution for at least one academic period (semester, trimester, quarter) during the year. An eligible educational institution generally includes any accredited public, nonprofit, or proprietary post-secondary institution eligible to participate in the student aid programs sponsored by the U.S. Department of Education.

You cannot claim this credit if your filing status is married, filing separate returns. Married employees may want to calculate their taxes both ways (filing jointly and separately) to see which is more advantageous to them.

Income Phase Out

Your education credits are gradually reduced if your modified adjusted gross income is between $45,000 and $55,000 (or $90,000 and $110,000 in the case of a joint return). If your adjusted gross income is over $55,000 (or $110,000 for joint filers) you cannot claim these credits.

Credits Are Not Refundable

These credits are subtracted from your tax liability, they are NONREFUNDABLE. This means if the credits are more than your actual federal tax liability, the excess is not refunded to you. Remember, these are not deductions, but actual credits to your federal tax.

Qualified Expenses

Qualified expenses include tuition and fees required for enrollment or attendance at an eligible educational institution. Books, room and board, insurance, equipment, transportation, or other personal living or family expenses are not considered qualified expenses. Fees are only included as qualified tuition and related expenses if they must be paid to the institution as a condition of enrollment or attendance.

If you pay for qualified tuition in an academic period that begins in the first three months of the following year, you can use this amount in figuring your credit for the prior year. This means that if you pay money in December 2005 for tuition due for the winter/spring term of 2006, you can use that amount in figuring your 2005 credit on your tax form.

Higher Education Tax Credits at a Glance

Do not rely on this chart alone. It provides only general highlights about some of the differences between the two credits.

How to Apply

Instructions accompanying Tax Form 8863: Education Credits (HOPE and Lifetime Learning Credits) will explain how to calculate the credits and how to claim them on your tax return.

Common Questions and Answers about the Hope and Lifetime Learning Credits

Q: May an individual claim a Hope or Lifetime Learning Credit for more than one family member?

A: Yes. Furthermore, the Hope Credit is calculated on a per student basis, and the Lifetime
Learning Credit is calculated on a per family basis. For example, if an individual whose modified adjusted gross income is $35,000 pays over $2,200 in qualified tuition and related expenses for him or herself and over $2,200 in qualified tuition and related expenses for a dependent child, and both the individual and the dependent child meet the eligibility requirements, the individual may claim a Hope Credit of $3,300 (i.e., a credit of $1,650 for his or her expenses plus a credit of $1,650 for the child’s expenses.)

Q: The amount a taxpayer may claim as a Hope Credit is gradually reduced for taxpayers with modified adjusted gross income between $45,000 and $55,000 (between $90,000 and $110,000 for married taxpayers filing jointly). How does this reduction work?

A: The reduction works on a sliding scale that reflects where the taxpayer’s modified adjusted gross income is in the phase out range. For example, if an eligible student (who is not anyone’s dependent for tax purposes) pays $2,200 or more in qualified tuition in a particular year, and the student’s modified adjusted gross income for the year is $50,000 (halfway along the $10,000 phase out range), the credit amount for the student is limited to $825. By contrast, if the same student’s modified adjusted gross income was $45,000, the credit amount for the student would be the maximum $1,650.

Where to Find Additional Information

IRS Public Information Line at (800) 829-1040

IRS web site at www.irs.gov

NYS & CSEA Partnership for Education and Training Office at (800) 253-4332

PEF Education and Training Office at (518) 785-1900

Development of this guide was jointly funded through the negotiated agreement between the State of
New York and the Civil Service Employees Association, Inc. and the negotiated agreement between
the State of New York and the Public Employees Federation, AFL-CIO. Program administration and
additional funding are provided by the Governor’s Office of Employee Relations.

Danny Donohue, President
Civil Service Employees
Association, Inc.
Local 1000, AFSCME
AFL-CIO

Gary Johnson, Director
New York State Governor’s
Office of Employee Relations

Kenneth Brynien, President
New York State
Public Employees Federation,
AFL-CIO

No. 4 Copyright © May 2007, NYS & CSEA Partnership for Education and Training.