The Hope Credit is one of a couple of tax credits for education. It was signed into law under President Clinton as part of the Taxpayer Relief Act of 1997. Since 1997, the amount of the credit has been tweaked, ultimately resulting in the American Opportunity Tax Credit, which was signed into law last year as part of the American Recovery and Reinvestment Act. The American Opportunity Tax Credit is only available for 2009 and 2010. Confused yet? Don’t be. Just think of the American Opportunity Tax Credit as the Hope Credit on steroids.
Here’s what you need to know:
1, In 2008, the maximum amount of the Hope credit was $1,800 (or $3,600 if a student in a Midwestern disaster area). In 2009 and 2010, the credit is worth up to $2,500 – a $700 increase. The credit is calculated as 100% of the first $2,000 of tuition, fees and course materials paid during the taxable year plus 25% of the next $2,000 of tuition, fees and course materials paid during the taxable year.
2, The Hope credit originally applied only to the first two years of college. The expanded American Opportunity Tax Credit can be claimed for expenses for the first four years of post-secondary education.
3, You are eligible for the credit if you pay qualified education expenses of higher education; you pay the education expenses for an eligible student; and the eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
4, “Qualified education expenses” now includes books (and thank goodness because they’re insanely expensive). Tuition, related fees, and other required course materials also qualify.
5, You cannot claim the credit if your filing status is married filing separately; you can be claimed as a dependent by another person; or if you or your spouse were a nonresident alien for any part of 2009 and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
6, Income requirements have also been increased from 2008. You qualify for the full credit if your modified adjusted gross income is $80,000 or less ($160,000 or less in the case of a joint return) for 2009. Note that phaseouts apply.
7, It’s worth noting upfront that the Hope Credit is a credit, not a deduction. Remember that a tax credit reduces the amount of tax on a dollar for dollar basis – this is a good thing. The Hope Credit was a nonrefundable credit which means that you could reduce your tax to zero but you could not have the “extra” credit refunded to you. Up to 40% of the American Opportunity Credit is refundable which means that even if you owe no tax, you can get some money back (restrictions apply).
8, You can claim the credit even if you used a student loan to pay them (hooray!).
There are other tax credits and education-related deductions available under the Code. Keep in mind that you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the lifetime learning credit. You have to choose. The tuition and fees deduction is merely a deduction – which is generally less advantageous than a tax credit – but run the numbers to see which benefits you more.
In recent weeks, I’ve received a flurry of emails from parents asking about whether band uniforms, soccer cleats and other expenses related to children are deductible. I thought it might be useful to have a checklist of some child-related deductions that you may be overlooking.
1, Child tax credit. If your modified AGI (adjusted gross income) is $75,000 or less for a single person or head of household ($110,000 for married taxpayers) and you have a qualifying child, you may be eligible for the child tax credit of up to $1000.
2, Child care expenses. If you paid qualifying child care expenses, you may be entitled to a tax credit for those expenses. For more details about what constitutes qualifying child care expenses, see my prior post.
3, Hope credit for college expenses. You may be eligible for a tax credit for your dependents who are college students in their first two years of college, provided that you are responsible for paying those expenses. The credit is up to $1,650 on the first $2,200 of college tuition and fees and is available for students engaged in study at least half-time.
4, Lifetime Learning Credit. You may be eligible for a tax credit of up to $2,000 on the first $10,000 of college tuition and fees for your dependents, provided that you are responsible for paying those expenses. This credit is available for students who take at least one course; the students need not be engaged in study at least half-time.
5, Tuition and Fees Deduction. Expenses for tuition, registration fees, and other required fees for your dependents who attend eligible educational institution (for example, most colleges, universities and vocational schools) may qualify for the Tuition and Fees Deduction. The deduction is limited to $4,000 per year. Your modified AGI must be less than $80,000 for a single taxpayer or head of household and $160,000 for married taxpayers.
6, Adoption Credit. If you have out of pocket expenses relating to adopting a child, you may be eligible for a credit of up to $11,650 per eligible child. Out of pocket expenses include adoption fees, legal fees, court fees and travel expenses; you are not eligible to deduct expenses that are reimbursed to you from any organization.
7, Medical and Dental Expenses. If you paid medical or dental expenses for your dependents, you may be able to take a deduction for the expenses that exceed 7.5% of your AGI.
8, Investment Fees and Expenses. To the extent that you pay investment fees, custodial fees, trust administration fees, and other expenses for managing investments that produce taxable income that is reported on your income tax return, those expenses are deductible. This includes fees related to income reported on your income tax return for investments in the names of your dependents.
9, Charitable Donations. While tuition payments for private and parochial schools are not usually deductible, donations of goods and cash may be. In fact, most schools (private, public and parochial) have 501(c)(3) status – if you’re not sure, just ask. If you make a donation of cash and goods that would otherwise qualify for a deduction, and you do not receive a benefit in return, the value of that donation is tax deductible.
Of course, this is just a short list and the expenses and credits listed may be subject to phase outs, eligibility requirements and other limitations. If you’re not sure whether these expenses or credits apply to you, ask your tax professional!
