Choose IRS Tax Credit For Education!
They say continuing one's education pays off one way or another. What many don't realize is they can make it pay sooner than they think. The government has a series of tax credits (the American Opportunity, the Hope and the Lifetime Learning) that can put thousands of dollars back in your pocket when it's time to pay your income tax.
It should first be understood that these credits are administered by the Internal Revenue Service, not the Board of Education. So one shouldn't expect the money to help pay tuition. It's money that's returned after filing every April and requires a special form (8863), which is attached to one's return. From there, the credit is applied to one's yearly income tax or, if the person earns a refund, it will be added to a refund check.
There are some other things to consider. Be aware that this is not a deduction, it is a credit. You only list these credits after you calculate your overall taxes. They do not appear as an expense or anything else. Next you are not allowed to do all three at once. If anything, an individual usually can only get one. Parents might be able to get two or more for such reasons as funding more than one child. The IRS does allow one to compare so one can get the maximum return. Filling out the 8863 with a tax consultant is a good idea.
The basics of these three education tax credits include:
(1) American Opportunity - This was actually introduced by President Obama in 2009 as part of his stimulus act. One must be an undergraduate, online or on campus, and taking at minimum a half-semester's worth of courses at any time. Also, if you're an individual, you must earn less than $90,000 adjusted gross income or $180,000 if filing a joint return. The maximum credit is $2,500 against taxes or a $1,000 refund. It can also only be used for two years, any two years, in a four year curriculum.
(2) Hope Tax Credit - This was introduced in 2001. It also can be used during the first two of a student's four undergraduate years. This time, the maximum income numbers are $60,000 for an individual and $120,000 for a joint return. One very important proviso is that if you attend school in a designated disaster area (such as New Orleans), you can get up to $3,600 credit. Otherwise it's $1,800.
(3) Lifetime Learning - One could say this credit is for people who don't fit into the tight restrictions of the first two, that is students from their third academic year into post-grad and those only taking a minimum number of courses a year. The phase out numbers are identical to the Hope. The credit is limited to $2,000 a year and disaster areas are not a factor in this either way.
For more information, the IRS has set up a series of web pages that spell everything out very clearly, even including a flow chart to find out if one can get the credits or not. There is no distinction made between traditional or distance learning colleges. Prior to starting classes everything possible, from federal Pell Grant possibilities, to scholarships and loans should be explored. Afterwards, learn about this educational credit as an adjunct to your college financing.
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