Friday, February 2, 2007


There are several options. A professional tax-preparer can easily select the best option if his software works like mine does. I enter the amount of the education expenses and check a box to select the Hope credit and check the tax result. Then I deselect the Hope credit and check the box for the lifetime learning credit and see if that increased or decreased the tax. Finally, I check the box for the deduction and see what that does. I then select the one that reduces the tax the most. Sometimes one or more of these methods results in a zero amount due to the taxpayer’s income, the student does not qualify, or the expense does not qualify.

If you do it yourself, then you need information beyond the scope of this blog, and should download publication 970 from Just type in 970 in the search box. Also, you should look at Forms and instructions for Form 1098-T, Form 8815, Form 8863. If you made an early withdrawal from an IRA look at the codes for penalty exclusions for Form 5329.

A Credit is not the same thing as a deduction.

There are several education-related tax provisions related to education expenses. Two arise frequently and can be confused with each other. One type is a credit and the other type is a deduction. A credit reduces your tax by the amount of the credit, but a deduction would only reduce your taxable income which only reduces it by a percent of the deduction.

Which should I take?

You may or may not qualify for all options .

Generally the credit is better than the deduction, but not always. There are two different credits, the Hope credit and the Lifetime learning credit. The credits have different income-related limitations than the deductions

Income limits for credits:
The credits are not available if your Adjusted Gross income (AGI) exceeds $ 110,000 on a Joint Return or $ 55,000 on other returns.

Income limits for the deductions:
Your AGI can be as high as $ 160,000 on a Joint return or $80,000 and still qualify for the deduction.

There are two different credits

The two credits are the Hope credit and the Lifetime learning credit. The Hope credit usually provides the best tax reduction, but the rules may prevent you from taking the Hope credit. The Hope credit is only available for the first two years of post-secondary education. The Lifetime learning credit does not have this limitation.

Rules That Apply to Both Credits and Qualified Education Expenses
Generally, qualified education expenses are amounts paid in
2006 for tuition and fees plus, in some cases, books, supplies and other costs as explained in Publication 970 .

LINKS and References – go to
IRS References

This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

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