Daily Deduction: A Child in College


Are you the proud parent of a college student?  Are you the college student of a proud parent?  If so, you may be eligible for some valuable tuition assistance from Congress.

The Hope and Lifetime Learning credits are available to people who pay the price for pursuing an education after high school.  The Hope Credit can be as much as $1,800 per student, and the Lifetime Learning Credit can be as much as $2,000 per tax return.  Unfortunately, you can’t claim them both; you must choose one credit per student.  So how should you choose the credit that’s best for your bottom line?  Everyone’s choice will be different, and it will depend mainly upon how many students you’re supporting and whether they qualify for the Hope Credit.  The two credits have similarities and differences, and we’ll explore each of them below.

Let’s start with the similarities.  Both credits are income limited.  To claim them, you must have a modified adjusted gross income (pdf) of less than $58,000 if you're single or $116,000 if you’re married filing jointly.  You must also pay the qualified educational expenses of yourself, your spouse, or a dependent that you claim on your tax return.  For instance, if your daughter is in college, but you still claim her as a dependent on your Form 1040, you can claim the Hope or Lifetime Learning credits.  But if your daughter claims herself as a dependent on her own tax return, only she can claim the credit.

In addition, both credits are calculated as a percentage of your education expenses.  Of course, the usual college tuition qualifies, but did you know that vocational institutions like cosmetic training programs and technical schools also count?  But you can’t include things like books, room and board, medical insurance or transportation costs.  Finally, it doesn’t matter whether you pay your expenses with borrowed money.  Both the Hope Credit and the Lifetime Learning Credit are equally available whether you’ve scrimped and saved or whether you’re borrowing from a lender such as Sallie Mae (Stock Quote: SLM) or Citi (Stock Quote: C).

So what are the differences between the credits, and which one should you choose?  The first difference, the amount of the credit, is a big one.  The Hope Credit, which is up to $1,800 per student, can add up fast if you have more than one child in college, but the Lifetime Learning Credit is $2,000 per tax return no matter how many of your children have their noses buried in collegiate books.  A second difference is timing.  The Hope Credit is only available for the first two years of post high school education, while the Lifetime Learning Credit is available forever.  Finally, a third difference is qualification.  In order to claim the Hope Credit, your student must take classes half-time for at least one academic period during the year and must be pursuing a degree.  This usually means that for at least one semester, your student must take half of the courses that a full-time student would take and must have at least some hope of eventually graduating.  But the Lifetime Learning Credit is not so limited.  You can qualify for the credit even if you’ve only taken one class.  And don’t worry about graduating—you have a whole lifetime.

What’s the moral of the story?  If you have a student in college, you should always claim the Lifetime Learning Credit first because it’s higher than the Hope Credit.  But you can only claim the Lifetime Learning Credit once, so if you have more than one student in college, pile on as many Hope Credits as you can.  If the Hope Credit isn’t available for your additional students, check back with us tomorrow to learn how you can deduct some of their expenses anyway.  Last, but not least, don’t forget to deduct your student loan interest.  Those classes will pay off for your kids someday, but if you remember to claim the Hope and Lifetime learning credits this year, you can make them pay off for you right now. 

Be sure to check out the complete archive of Daily Deductions.

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