Federal tax credits and deductions are the newest forms of federal aid. A tax credit is money which can be subtracted from the amount of taxes you owe. In order to receive a tax credit, you must complete a federal tax return, meet certain federal guidelines, and pay taxes. Tax credits are subtracted directly from the tax a family owes. Tax deductions differ from tax credits in that deductions are subtracted from your taxable income.
For tax year 2009, there are three tax credits available to help offset the costs of higher education by reducing the amount of your income tax. These tax credits are the American Opportunity Credit, the Hope Credit and the Lifetime Learning Credit.
*A taxpayer can only claim one of these credits for the same student in the same year.
American Opportunity Credit:
For tax year 2009, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Your allowable American opportunity credit may be limited by the amount of your income. The nonrefundable part of the credit may be limited by the amount of your tax.
The American opportunity credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2009 for an academic period beginning in 2009 or the first three months of 2010.
You can claim the American opportunity credit if all four of the following requirements are met.
- You pay qualified education expenses of higher education.
- You pay the education expenses for an eligible student.
- The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
- You choose not to claim the Hope credit for any student in 2009.
Schools are required to send this information to each taxpayer and to the IRS by Jan. 31, 2010, in the form of a
1098-T statement. Taxpayers use this information and their own records about tuition and fees paid when they fill out IRS form 8863 to claim the tax credit.
Hope Scholarship Tax Credit:
The Hope Credit is a nonrefundable tax credit, not a scholarship or tax deduction. To receive the Hope tax credit, a family or student must file a federal tax return and
owe taxes.
The new American opportunity credit has replaced the Hope credit for most taxpayers. However, a larger Hope credit ($3,600 maximum) is available for students meeting the special rules for the Midwestern disaster areas. In order to claim the Hope credit for 2009, you must:
- Claim the Hope credit for at least one student attending an eligible institution in a Midwestern disaster area, and
- Choose not to claim the American opportunity credit for any student in 2009.
For 2009, you may be able to claim a Hope credit of up to $1,800 ($3,600 if a student is in a Midwestern disaster area) for qualified education expenses paid for each eligible student.
The exact amount of the Hope credit also depends on a family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. The total credit is also based on how many eligible students are in a family.
An eligible student must be enrolled at least half-time, for at least one academic period beginning in 2009, at an eligible program leading to a degree or certificate at an eligible school
AND cannot have completed the first two years of undergraduate study. You may claim the credit yourself if you are not claimed as a dependent by another taxpayer.
Schools are required to send this information to each taxpayer and to the IRS by Jan. 31, 2010, in the form of a
1098-T statement. Taxpayers use this information and their own records about tuition and fees paid when they fill out IRS form 8863 to claim the tax credit.
Lifetime Learning Tax Credit:
The Lifetime Learning Credit is a nonrefundable tax credit available to individuals who file a tax return and owe taxes. Individuals who do not pay taxes are not eligible for a Lifetime Learning credit.
A family may claim a tax credit of up to $2,000 per tax year for the taxpayer, taxpayer's spouse, or any eligible dependents for an unlimited number of tax years.
An eligible student may be enrolled in an eligible program leading to an undergraduate or graduate degree at an eligible school during the calendar year
OR may be enrolled in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. Students may claim the credit themselves if they are not claimed as a dependent by another taxpayer.
Schools must send this information to taxpayers and to the IRS by January 31, 2010, in the form of a
1098-T statement. Taxpayers will use this information and their own records about tuition and fees paid when they fill out the IRS Form 8863 to claim the tax credit.
Tuition and Fees Deduction:
The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 for 2009. This deduction may benefit taxpayers who do not qualify for either the American Opportunity, Hope or Lifetime Learning Education Tax Credits.
Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible postsecondary institution. Personal living and family expenses, including room and board, insurance, medical, and transportation, are
not deductible expenses.
An eligible student must be enrolled in one or more courses at an eligible educational institution.
An eligible institution that received payment for tuition and fees in the 2009 tax year must issue IRS Form 1098-T (the Tuition Statement) to each student by January 31, 2010. The information on that form will help taxpayers determine whether they can claim a deduction for 2009.
Student Loan Interest Deduction:
If you paid interest on a student loan in 2009, you may be eligible to deduct up to $2,500 of the interest you paid, whether the loan was for your own education, your spouse's, or that of a child or anyone else who was your dependent at the time the education was undertaken. The deduction is claimed as an adjustment to income.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses
You can't claim this deduction at all if you are married filing separately, or if you can be claimed as a dependent on someone else's return.
Your lender will send you a
Form 1098-E. The amount of interest you paid on your student loans for the year will be reported on Form 1098-E, box 1.
For more information please visit the
Internal Revenue Service or
National Association of Student Financial Aid Administrators (NASFAA)