Tax credits are available for qualified education expenses paid by taxpayers who are continuing their education. A qualified education expense is defined as an expense that is paid during the tax year for fees and tuition requied by an eligible educational institution for the purpose of student enrollment and attendance. It does not matter how the expenses are paid, only that they are valid. Expenses that are not considered valid are those paid for room and board, medical expenses, student health fees, transportation, personal living expense, insurance, course-related books, supplies, equipment, or any non-academic activity or non-credit course. This basically leaves only tuition costs as valid education expenses.
If a deduction for education expense is taken on any other portion of the personal tax return, it cannot be used in the calculation of a Hope or Lifetime Learning credit. If a Pell grant or a scholarship is received, the taxpayer must deduct the amount of the grant or scholarship from qualified expenses. Since most Pell grants and scholarships are taxable, taxes may be imposed, but the tax credit can be taken as well. Taxpayers can use any prepaid amounts made on the current years tax return if all other guidelines have been followed.
The Hope credit and the Lifetime Learning credit cannot be taken jointly. A taxpayer must select one or the other. The Hope credit can be taken only in the first two years of college as defined by the educational institution. It cannot total more than $1500. The Lifetime Learning credit is set at a maximum of $2000 for 2005. It cannot be taken together with the Hope Credit, even if expenses exceed Hope limits. If this is the case in the first two years at the educational institution, the taxpayer may include the excess on Schedule A.
Educational credits are limited by the level of income and the adjusted gross income totals. When calculating these credits, taxpayers must consider their income and expense levels and their current student status, since the Hope credit expires after the second year of higher education. Excess expense deductions can be taken under the itemized deduction expenses on Schedule A, if a Hope or Lifetime Learning credit is at the maximum.
Taxpayers and eligible dependents of taxpayers are allowed to take these credits. In general, the expenses of dependent students are claimed by their parents or legal guardians. Students who cannot be claimed as someones dependent can take the education credit even if they are not paying the expenses.
Everyone who can take the credit should do so. Higher education can be very expensive, so anyone furthering their education in order to improve their future financial situation should take advantage of the relief provided by the education tax credit.