Let Uncle Sam Help You Pay for College

October 30, 2005

While reading this, it may be helpful to have IRS Publication 970 handy.

With the cost of college going up every year, it’s nice to get a little help from the IRS. Notice in that last sentence that I said “a little help” because it really isn’t that much of a benefit. But, every little bit helps.

The IRS offers four ways to save on your taxes:

1. The Hope Credit
2. The Lifetime Learning Credit
3. Student Loan Interest Deduction
4. Tuition and Fees Deduction

It’s important to understand each of these because you can only choose one to use on your taxes. Therefore, you will need to compute the value of each credit and deduction to see which one is best for your situation. My goal with this post is to explain the different credits and deductions.

The Hope Credit

The amount of the Hope credit is 100% of the first $1,000 of qualified expenses plus 50% of the next $1,000 of such expenses for each eligible student. An eligible student for the Hope credit is an individual who is enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution. The Hope credit is available only to students who, as of the beginning of the tax year, have not completed their first two years of post-secondary education.

The Lifetime Learning Credit

The amount of the Lifetime Learning credit is 20% of the total qualified expenses for all eligible students on the tax return. The maximum amount of expenses allowed per tax return is $10,000, so the maximum annual credit is $2,000, regardless of the number of eligible students. The lifetime learning credit can be claimed for an unlimited number of tax years.

Both the Hope credit and lifetime learning credit are subject to income limitations, which phase out the credits for taxpayers with modified Adjusted Gross Income between $85,000 and $105,000 (MFJ) and $42,000 and $52,000 for single and head of household. The credit can be computed using the following formula (using figures for married filing jointly status):

Credit X ($105,000 – Modified AGI)/$20,000

The $105,000 is the upper limit of the threshold and the $20,000 is the difference between $105,000 and $85,000. So, if a taxpayer has a tenative credit of $1,000 and modified AGI of $95,000, their credit would like this:

$1,000 X ($105,000 – $95,000)/$20,000

$1,000 X ($10,000/$20,000)

$1,000 X .50


With my next post, I’ll discuss the deductions for educational expenses.