Tax credits ease burden of college expenses

High-income parents may elect a deduction

Tax Tips

Sixth in a series YOUR MONEY

March 07, 2004|By Lorene Yue

Parents with children in college have a few choices when it comes to claiming tuition expenses on their personal income tax returns.

Tax experts said filers can choose between education credits and deductions.

The difference? Tax credits lower the amount of taxes you owe, while deductions lower the amount of income you are taxed on. You'll have to choose one. You can't claim a credit and a deduction for the same expense.

This week we'll talk about tax credits. Although tax experts recommend choosing a credit over a deduction, you'll want to take a deduction if your income knocks you out of taking a credit. Of course, there are income limitations to taking a deduction, too, but more on that next week.

Education credits come in two parts: the Hope Credit, covering the first two years of college, and the Lifetime Learning Credit, for post-secondary education as well as courses to acquire or improve your job skills.

The amount of credit you can claim begins to phase out if your modified adjusted gross income is more than $41,000 for a single filer or $83,000 for joint filers. It ends with a modified adjusted gross income of $51,000 for an individual or $103,000 for joint filers.

If you are eligible for the full amount of the tax credit, the Hope Credit lets you claim 100 percent of the first $1,000 you spend on college tuition and related expenses, plus 50 percent of the next $1,000. Money used toward room and board and books, if not required as conditions of enrollment, does not qualify for this credit. The maximum you can claim is $1,500 per student per year.

The Lifetime Learning Credit provides a maximum $2,000 tax savings, or 20 percent of the first $10,000 used for tuition. Fees and expenses for books and equipment also count if they are paid to the university and are a condition of taking the class.

Unlike the Hope Credit, this one is limited to $2,000 per return regardless of the number of family members in college.

Tax experts said to take the credit that gives you the greater benefit. If the total qualified education expenses are less than $7,500, you generally are better off claiming the Hope Credit.

Next week: Education deductions

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