The Hope Credit and the Lifetime Learning Credit were introduced in 1998 to help with higher education expenses. The credits are available for qualifying education expenses beyond high school for taxpayers, their spouses, and their dependents.
The 2009 Recovery Act modified the Hope Credit for 2009 and 2010, and renamed it The American Opportunity Tax Credit.
Hope Credit (AKA American Opportunity Tax Credit)
For 2009 and 2010, the credit is 100% of the first $2,000 and 25% of the next $2,000 of qualifying expenses, with a maximum credit of
$2,500 per eligible student (subject to income limitations, discussed later.) The credit is available to students who:
• Have not completed the first four years of education beyond high school as of the start of the tax year.
• Have enrolled in a degree or certification program at least half-time.
• Have not been convicted of a federal or state felony for possession or distribution of a controlled substance.
For 2009, the Hope Credit is allowed against alternative minimum tax. Individuals owing no taxes can potentially receive 40% of the credit
as a refund, up to $1,000.
Income Limits for Hope Credit
For 2009 and 2010, a single taxpayer’s Hope Credit will be reduced if modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing joint
returns). Hope Credit benefits are not available for taxpayers with income exceeding the above MAGI levels.
Lifetime Learning Credit
The credit is 20% of the first $10,000 of qualifying expenses for all eligible students in the family, with a maximum credit of $2,000 per family (subject to income limitations, discussed later). The credit is
• One or more post high-school courses taken by the student during the year, including graduate courses.
• Courses taken to improve or acquire job skills.
For 2009, the Lifetime Learning Credit is allowed against alternative minimum tax. Also, it is a nonrefundable credit, meaning that individuals who do not owe tax do not benefit.
Income Limits for Lifetime
For 2009 and 2010, the Lifetime Learning Credit is reduced for single taxpayers with MAGI between $50,000 and $60,000 ($100,000 and $120,000 for married couples filing jointly). Benefits are not available for taxpayers with income exceeding the above MAGI levels.
Certain education expenses paid for you, your spouse, and any dependent claimed on your tax return for the year may qualify.
Qualifying expensesfor both credits include:
• Amounts spent for qualified tuition and related expenses required for enrollment or attendance at an eligible educational institution.
• Fees for course-related books, supplies, equipment, and student activity fees, but only if they are paid to the institution as a condition
of enrollment or attendance.
For the Hope Credit, qualifying expenses also include course materials. Course materials are defined as books, supplies, and equipment needed for a course of study whether or not the materials
are purchased from the educational institution as a condition of enrollment or attendance.
Qualifying expenses do not include insurance, medical expenses, room and board, transportation, or other personal living expenses (even if students are required to reside on campus).
Eligible Educational Institutions
Any accredited college, university, vocational school, or other accredited post-secondary educational institution deemed eligible to
participate in a student aid program administered by the Department of Education qualifies as an eligible educational institution. This includes most (but not all) accredited, public, nonprofit, and privately owned institutions. An institution will be able to tell you if it qualifies.
Duplicate Benefits Not Allowed
• You cannot claim an education credit if you claimed a tuition and fees deduction in the same year for the same student.
• You cannot claim a business expense deduction for the same amount.
• You must reduce the amount of qualified expenses that were paid with certain tax-free funds (i.e., scholarships, grants, employer, or
VA assistance benefits), unless the student waives the tax-free treatment.
• Qualified expenses must be reduced by the amounts used to exclude the interest income on savings bonds.
• For the same student, you can claim both an education credit and an income exclusion for distributions from an education savings account (ESA) or from a qualified tuition program (QTP). However, when determining the excludable amount for ESA and QTP distributions, qualified education expenses are first reduced by those taken into account in claiming an education credit.
Deduction for Student Loan Interest is Allowed with These Credits
• In general, taxpayers are allowed to deduct up to $2,500 in student loan interest they paid during the year.
• A taxpayer cannot claim the deduction in any tax year in which his or her filing status is married filing separately.
• The deduction is subject to modified adjusted gross income phase-outs for taxpayers with MAGI between $60,000 and $75,000 ($120,000 and $150,000 if married filing jointly) for tax
years beginning in 2009.
Choosing the Right Credit
Most people will use the Hope Credit if they are eligible and the Lifetime Learning Credit if not. If you have qualifying expenses for more than one student in a year, you can choose the credit on a
Who Can Claim the Credit
In any given year, only one person can claim an education credit for an individual student’s expenses. If a student is not a dependent, the
student claims his or her own education credit. If a student is a dependent, the person entitled to the dependency exemption is eligible for the education credit based on the expenses of the dependent
student. However, the student may claim the education credit for his or her qualified tuition and related expenses if the person eligible to claim the student, such as a parent, forgoes the dependency exemption. In this situation, no one claims the dependency exemption but it allows the student to claim his or her own education credit if that is more beneficial.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#856 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002