September 6, 2010

A review course on education tax credits

As the fall semester starts up, so do questions about education tax credits. The interest is natural — credits are valuable tax breaks, because you can subtract them directly from the income tax you owe.

So what education credits can you claim on your 2010 federal income tax return? The Hope Scholarship/American Opportunity Credit and the Lifetime Learning Credit are available this year, and, as you may already know, have many similarities.

For instance, to be eligible for these credits, the qualified out-of-pocket education expenses you pay in 2010 must be for academic periods that begin this year or in the first three months of 2011. Tuition and fees are qualified education expenses for purposes of claiming the credits, while room and board are not.

How do the credits differ? One difference is the maximum available amount. Generally, you can claim up to $2,500 per eligible student when you qualify for the Hope Scholarship/American Opportunity Credit, while the most you can claim for Lifetime Learning Credit is $2,000.

Another difference: The adjusted gross income level at which the credits begin to shrink. For 2010, the phase-out for the Hope Scholarship/American Opportunity Credit starts at $80,000 when you're single ($160,000 for married filing jointly). For the Lifetime Learning credit, the phase-out begins at $50,000 for singles ($100,000 when you're married filing jointly).

Call for more information. We have a complete list of education tax benefits, including qualified savings bond interest, tuition and student loan deductions, and withdrawals from IRAs and college savings plans.