How To Determine Your Education Tax Credit Amount

An education tax credit is available to offset the cost of higher education for a taxpayer. There are 2 main tax credits available for education, the Hope Scholarship and Lifetime Learning credits. Qualifying for either the Hope of Lifetime Learning programs depends on the income level of the taxpayer as the programs phase out for incomes of $58,000 or more (for 2008).

Qualifications for Education Tax Credits

For 2008, the amount of a Hope or Lifetime Learning Credit is reduced for those taxpayers that have a modified adjusted gross income (MAGI) of between $48,000 and $58,000, or $96,000 and $116,000 for joint filers. Taxpayers that have a MAGI of $58,000 or more, or $116,000 for joint filers cannot claim either the Hope or Lifetime Learning credits.

Hope Scholarship Credit

The amount of the Hope Scholarship credit on a per student basis is the sum of 100 percent of the first $1,200 (or $2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the student, and 50 percent of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student. The maximum amount of Hope Scholarship credit in 2008 is $1,800 per student. This amount was doubled for students in a Midwestern disaster area in 2008.

The Hope Learning credit is a tax credit that is used to reduce a taxpayer’s overall tax. A tax credit is subtracted from the tax a taxpayer owes. This differs from tax deductions, which are subtracted from taxable income. In order for a taxpayer to receive the Hope Scholarship credit, the taxpayer must file a federal tax return in which they owe taxes. The Hope Scholarship credit is not available to taxpayers that do not pay taxes. The amount that a taxpayer receives is up to the limit but cannot exceed the amount of tax owed.

Lifetime Learning Credit

The Lifetime Learning credit on a per student basis was up to $2,000 or students to meet qualified education expenses and up to $4,000 for students in a Midwestern disaster area. A qualified education expense includes books, supplies, room and board, and additional expenses for special need students. Congress extended the tax benefits for both programs until December 31, 2009 as a part of the economic stimulus package.

The Lifetime Learning credit is similar to the Hope Scholarship credit in that it is only available to taxpayers that file and owe taxes. A taxpayer that does not owe taxes will not receive the Lifetime Learning credit. The amount of credit received for the Lifetime Learning credit is equal to 20 percent of $10,000 of qualified education expenses paid ($2,000). Unlike the Hope Scholarship credit, the Lifetime Learning credit is available for all years of postsecondary education whereas the Hope Scholarship is only available for the first 2 years.

Form 1098-T and 8863

A taxpayer must receive from their educational institution a Form 1098-T and file the Form 8863 to claim the credit. The Form 8863 must be attached to the Form 1040 or 1040A; taxpayers who do not itemize their taxes and file the Form 1040EZ will not qualify for either the Hope Scholarship or Lifetime Learning credits.