If you or a dependent have college related expenses, you should review the following federal education tax credits as you prepare your 2009 federal tax return. These tax credits may be claimed for qualified education expenses of the taxpayer, taxpayer's spouse or taxpayer's dependents.
1. American Opportunity Credit was created by the Obama administration to assist students and parents defray the cost of the first four years of college. The American Recovery and Reinvestment Act modified the Hope Tax Credit for tax years 2009 and 2010. As a result it is available to more individuals. Taxpayers may qualify for a tax credit of up to $2,500 per student per tax year. Up yo 40% of the credit is refundable, which could lead to a $1,000 refund even if the tax payer does not owe taxes.
2. Hope Tax Credit has been around since the Clinton administration and has been applied to the tax year 2008 and earlier, but has been expanded for tax year 2009. The credit may be claimed for up to $3,600 for a student attending a Midwestern disaster area, as long as the American Opportunity Credit is not taken. This credit may be taken by either the student or the parents to assist with the cost of the first two years of college.
3. Lifetime Learning Credit is another Clinton era education credit. It can be used to assist with college expenses, including graduate and professional degree courses. This includes job skills improvement courses, regardless of length of program. Credit is for up to $2,000 per tax return. If the student attends a college in a Midwestern disaster area, the limit is $4,000 per tax return.
You can not claim the American Opportunity Credit, Hope Credit and the Lifetime Learning Credit for the same student in the same tax year. You may claim more than one education tax credit in a year for different different students.
4. Tuition and Fees Deduction may be claimed by students or parents for qualified tuition and related expenses up to $4,000. This is a deduction and not a tax credit, which means that the qualified amount is deducted from taxable income. It reduces the income subject to tax and as a result the amount of taxes paid. Also, you can not claim an education tax credit in the same tax year that you use the Tuition and Fees Deduction.
Note: Students can not take this deduction, if claimed as a dependent of a parent.
5. Student Loan Interest Deduction may be takedn if you paid student loan interest in 2009. You may be able to take a Student Loan Interest Deduction of up to $2,500. To qualify your tax filing status can not be “married, filing separate”; your Adjusted Gross Income (AGI) is less than $70,000 or $145,000, if filing jointly; you or you spouse, if filing jointly, can not be claimed as a dependent on someone else's tax return. The deduction will phase out at certain AGI levels.
For more information on these credits and deductions, you may refer to the following IRS publications: Publication 970 Tax Benefits for Education and Form 1098 E, Student Loan Interest Statement and discuss them with your tax preparer.