Hope Scholarship Credit
Taxpayers may be eligible to claim a nonrefundable Hope Scholarship Credit against their federal income taxes. The credit may be claimed for qualified tuition and related expenses of each student in the taxpayer's family who is enrolled at least half-time in one of the first two years of post-secondary education and who is enrolled in a program leading to a degree, certificate, or other recognized credential. The maximum credit for a taxable year is $1,650 per qualified student. (100% of the first $1,100 plus 50% of the second $1,100). And is limited to two tax years per student.
The credit is for payment of tuition and related expenses, (expenses include required fees only, not room and board, books, transportation or student activity expenses) made on or after January 1, 2006, for academic periods beginning on or after the same date. Payments may come from loans, student earnings, gifts, inheritance or savings. Payments coming from Pell Grants, tax-free scholarships or employer-provided educational assistance are not allowed to be taken into consideration when calculating the credit. In a year where the student receives a tax-free Education IRA, none of the student's expenses will be allowed unless the tax-free status of the IRA is waived.
The amount a taxpayer may claim as a credit is gradually reduced for taxpayers who have modified adjusted gross income from $45,000 to $55,000 for filing single and $90,000 to $110,000 for filing jointly. Married filing separate taxpayers will not be able to take the credit.
Lifetime Learning Credit
This credit may be claimed for qualified tuition and related expenses of the taxpayer, spouse and dependents who are enrolled in eligible educational institutions without regard to the number of credit hours a student is taking or whether or not they are seeking a degree. The credit amount is equal to 20% of the taxpayer's first $5,000 of out-of-pocket qualified tuition and related expenses for all the students in the family (Unlike the Hope Credit, which is per student). The maximum credit is $2,000. The credit is for payment of tuition and related expenses (expenses being required fees only) made on or after January 1, 2006. Unlike the Hope Scholarship Credit, which is limited to the first two years of post-secondary education, there is no limit to the number of years in which a Lifetime Learning Credit may be claimed. Payment sources and phase out amounts are the same as the Hope Scholarship Credit.
Coverdell Education Savings Accounts (CESA's)
Taxpayers may deposit up to $2000 per year into a CESA for a child under the age of 18. Amounts deposited grow tax free until distributed and the monies will not be taxed if used for higher education expenses. Since the Hope and Lifetime Learning Credits may not be taken in the same year a student takes a tax-free withdrawal from a CESA, it may not be to the taxpayers advantage to use this as a savings vehicle unless the child is very young, please consult your financial advisor prior to investing.
Student Loan Interest Deduction
Taxpayers who have taken loans to pay the cost of attending an eligible education institution for themselves, their spouse, or their dependents may be able to deduct interest they pay on these loans. This is a reduction in taxable income, unlike the Hope and Lifetime Learning Credits, which are reductions in federal income taxes. The loans must have been used for tuition, fees, room, board, books, equipment and other necessary expenses in both post-secondary and graduate school. The loans may have come from any source, (except related parties) not just federally guaranteed or subsidized loans. The amount of the taxpayer's deduction is gradually reduced for single taxpayers with modified adjusted gross income between $50,000 and $65,000 and married filing jointly taxpayers between $105,000 and $135,000. The maximum deduction for the 2006 tax year is $2,500 regardless of the number of students in the family. Note that only the person who is legally required to make the interest payments may claim the deduction and the deduction is not allowed to an individual who is properly claimed as a dependent on someone else's tax return for that year; nor to married taxpayers filing seperate returns.
