Income Tax Breaks for Students

Students - or their parents - may be able to save a few dollars on their taxes.

by Rebecca Berlin - Published in 2001
If you, your spouse, or your children attended college, you may be able to take advantage of the Hope Scholarship Credit or the Lifetime Learning Credit on your federal income taxes. Since these are tax credits, rather than deductions, they reduce your income tax dollar for dollar.

The Hope Scholarship Credit

The Hope Scholarship Credit provides a tax credit for 100% of the first $1,000 and 50% of the second $1,000 of qualified tuition and expenses of each eligible student in your family who is enrolled at least half time in either the first or second year of post secondary education. This could be you, your spouse, or any of your children you can claim as dependants.

For married taxpayers with adjusted gross income from $80,000 to $100,000, or single taxpayers with adjusted gross income from $40,000 to $50,000, the amount of the credit you will be able to take is reduced. The credit is not available for married taxpayers with adjusted gross income above $100,000 or single taxpayers with adjusted gross income above $50,000.

To be eligible for the Hope Scholarship Credit, a student must:

Be enrolled at least half-time

Be in the first or second year of post secondary education

Be enrolled in a program that leads to a degree or certificate

Not have a felony conviction for possession or distribution of a controlled substance.

What are qualified tuition and expenses? They are tuition and fees that the student is required to pay to be enrolled. It does not include room, board, student activities, athletics, insurance, books, equipment, and transportation. Also, if a student receives a tax-free grant or scholarship, those funds must be applied to tuition before the Hope Scholarship Credit, even if they were used for something else, such as room and board. For example a student who pays tuition of $5,000, and receives a tax-free grant of $4,000, must apply the $4,000 to tuition for purposes of claiming the Hope Scholarship Credit even if the student used their grant money for room and board. In this example the student would still be able to claim a $1,000 tax credit.

Parents can claim the credit for their qualifying children if they claim the child as a dependant on their federal income tax return. A student cannot claim the credit, though, if their parents can take them as a dependant, even if the student files their own income tax return and pays their own tuition. Also, if a married taxpayer wants to claim the Hope Scholarship Credit, they must file a joint return with their spouse.

Lifetime Learning Credit

The Lifetime Learning Credit provides a tax credit for 20% of the first $5,000 of qualified tuition and expenses for each family. Expenses that are considered qualified tuition and expenses are the same as for the Hope Scholarship Credit. Unlike the Hope Scholarship Credit, a student is eligible for the Lifetime Learning Credit even if they are beyond their first or second year of post secondary education and even if they only take one class.

A student cannot claim both the Hope Scholarship Credit and the Lifetime Learning Credit, only one or the other. A taxpayer can claim both credits on their return, though, as long as the credits are claimed for different students. For example, a taxpayer has 2 children she claims as dependants. Both go to the same college and have qualified tuition and expensed of $3,500 each, but one is a freshman and one is a junior. The taxpayer can claim the Hope Scholarship Credit in the amount of $1,500 for the freshman student (100% of the first $1,000 and 50% of the second $1,000). The taxpayer can also claim the Lifetime Learning Credit in the amount of $700 for the junior student (20% of $3,500).

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