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Education Tax Credits

What are they and who can use them?

There are normally two types of tax credits, the American Opportunity Credit (formerly know as the Hope Scholarship Credit) and the Lifetime Learning Credit, available to persons who pay higher education costs. Now there is also the Midwest Disaster Relief Tax Credit which congress based in 2008.

Not sure what tax credits apply to you? Use our Education Tax Credit Form to get an estimate of your potential tax credits!

These credits will offset tax, dollar for dollar. These credits are available for qualified tuition and/or related fees of the taxpayer, the taxpayer’s spouse or a dependent of the taxpayer claimed on the taxpayer’s return. If a parent claims a child as a dependent, that parent may claim the education credit for the child. Qualifying expenses paid by a student (or by someone else on the student’s behalf) are considered to have been paid by the parent if the student is claimed as a dependent on the parent’s tax return.

Here's the breakdown on these credits:

American Opportunity Credit (Hope Scholarship Credit renamed) – This credit is increased for 2009 and 2010 to 100% of the first $2,000 and 25% of the next $2,000 for tuition, fees, and books (maximum of $2,500), and extending the credit to the first 4 years of post-secondary education. Also in 2009 and 2010, the credit is 40% refundable, meaning you can receive a refundable credit (maximum of $1,000) for 40% of qualified education expenses even if you have no tax liability. This credit is per student, per year. A family may have more than one eligible student in a year. The student must be enrolled in a program that leads to a degree, certificate, or other recognized educational credential. The student must take at least one-half of the normal full load for the student’s course of study.

Lifetime Learning Credit – Tax credit of 20% of up to $10,000 of qualified tuition and fees paid during the tax year (maximum of $2,000). This credit is per taxpayer, per year (i.e. per tax return). This credit is less restrictive, in that there are no degree requirements, no workload requirements, and is available for an unlimited number of years.

Midwest Disaster Relief Credit - As the result of severe storms and flooding in the Midwestern region of the country during the summer of 2008, Congress passed the Midwest Disaster Relief legislation. This legislation doubled the tax credit for students attending eligible institutions in the Midwestern disaster area for tax years 2008 and 2009. In addition to tuition and fees, qualified expenses also include room, board, and books. This legislation provided significant tax savings for eligible students and their families. Unfortunately, many taxpayers were and are unaware of this enhanced tax credit and consequently did not take advantage of it. If you are among those who missed this credit, see one of our tax professionals. They can quickly prepare an amended return requesting the full amount of refund due you.

For tax year 2009, the taxpayer may elect to use either the 2008 provisions of the Hope/Lifetime credits with the Midwestern Disaster Relief enhancements (if applicable) or the provisions of the American Recovery and Reinvestment Act, which were addressed above. The taxpayer should calculate the return multiple ways to ensure they are maximizing their refund. As always, we suggest you see our tax professionals to ensure you are maximizing your tax position.

Use our Education Tax Credit Form to receive an estimate your potential tax savings from these education credits.

Adjusted gross income phase-out limits apply to both these credits. The American Opportunity Credit will phase-out for single filers with adjusted gross income in excess of $80,000 ($160,000 for join filers). The Hope Scholarship Credit will phase-out for single filers with adjusted gross income in excess of $48,000 ($96,000 for joint filers). Consequently, in situations of high income taxpayers, it may be advantageous to take a tuition and fee deduction against gross earnings, up to $4,000. Other restrictions and criteria apply to these credits. Our tax professionals will help you determine the best credit/adjustment to minimize your tax bill.

Even though tuition, fees, books, etc. may be paid with proceeds from a student loan, you still qualify to claim the education credits on your tax return. The expenses are used to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid.

Related IRS Publications: 970