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Back to school basics: How to qualify for the Hope and Lifetime Learning credits

Money Management

Monthly financial advice
from the MACPA

For release: August 2006

If you have a student heading off to college, you'll want to do some homework to see if you qualify for the Hope credit or the Lifetime Learning credit.

According to the Maryland Association of CPAs, these two education tax credits can help defray education expenses for you and your family. And because a tax credit is subtracted dollar-for-dollar from the taxes owed, it's more favorable than a tax deduction, which simply reduces the total income on which your tax is based. For example, if your tax bill is $2,000 and you qualify for a $1,000 education credit, you can cut your tax bill in half.

The Hope credit increases

For 2006, the maximum Hope credit has been increased to $1,650, up from $1,500 in 2005. To calculate the credit, you claim 100 percent of the first $1,100 in college tuition and fees for each eligible student, plus 50 percent of the next $1,100, for a maximum tax credit of $1,650 per eligible student.

The Hope credit can be claimed only for the first two years of pursuing a degree at a college or other post-secondary institution. The student must be enrolled at an eligible education institution at least half-time during the year.

You can claim the Hope credit for qualified education expenses for yourself, your spouse or a dependent for whom you claim an exemption on your tax return. Expenses that qualify are tuition and fees required for enrollment or attendance.

Generally, books, room and board, student activities, athletics, insurance, equipment, transportation or other similar personal living expenses do not qualify for the purpose of calculating the Hope credit.

The Lifetime Learning credit

While the Hope credit is available only for the first two years of college, the Lifetime Learning credit applies to any person taking undergraduate or graduate classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees for yourself, your spouse, or your dependent child.

The qualifying expenses and eligible institutions are the same as for the Hope credit. But unlike the Hope credit, you can take advantage of the Lifetime Learning credit even if you're only taking one college course.

The Lifetime Learning credit, which may be claimed for an unlimited number of years, is calculated per family, not per student. The maximum credit ($2,000) is the same, regardless of how many family members are in school.

Study the fine print

You cannot claim both the Hope credit and the Lifetime Learning credit for the same student in the same year. But if you pay qualified education expenses for more than one student during the same year, you can claim the Hope credit for one eligible student and the Lifetime Learning credit for another student.

The Hope and Lifetime Learning credits are phased out for higher-income taxpayers. To qualify for the full credit in 2006, your modified adjusted gross income (MAGI) must be below $90,000 for married taxpayers filing jointly and below $45,000 if you're a single filer. A partial credit is available for joint filers with an MAGI between $90,000 and $110,000 and for single filers with an MAGI between $45,000 and $55,000. You cannot claim an education credit if your MAGI is $110,000 or more if you file a joint return ($55,000 for single filers).

To apply for the Hope or Lifetime Learning credits, you must complete IRS Form 8863, Education Credits, and submit it with your tax return. Educational institutions are required by law to send students Form 1098-T, which shows the amount of qualified tuition and related fees paid during the tax year.

A CPA can help

If you have questions about the education tax credits, consult with a CPA. He or she can help you make the best use of this valuable tax-saving strategy.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.

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