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How to get College Tax Credits

The American opportunity credit, Hope Credit and Lifetime Learning Credit offer a way to save while paying for college. The rules for each tax season are published on the IRS website in January. Rules may change slightly every year in response to world trends. Below is a summary of these three credits for tax years 2009 and 2010. You may also want to consider student loan interest deductions.

The American Opportunity Credit

For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Generally, you can claim the American opportunity credit if you pay qualified education expenses of higher education, the education expenses for an eligible student. The eligible student must be either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return and if you choose not to claim the Hope credit for any student in 2009.

Note that you cannot claim tuition or expenses paid for with tax-free educational assistance such as scholarships or grants, and double benefits are not allowed. Double benefits include deducting education expenses on your income tax return and also claiming one of these tax credits based on those same expenses. Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

The Hope Credit

The American opportunity credit has replaced the Hope Credit for most tax payers, however a larger hope credit is available ($3,600 maximum) is available for students meeting the special rules for the Midwestern disaster areas, for other students the maximum is $1800. In order to claim the Hope credit for 2009, you must: Claim the Hope credit for at least one student attending an eligible institution in a Midwestern disaster area, and choose not to claim the American opportunity credit for any student in 2009.

You cannot claim the Hope credit for one student and the American opportunity credit for another student in the same year. If you want to claim either of these credits for 2009, you must use the same credit (Hope or American opportunity) for all eligible students. And, in order to claim the Hope credit for any student, at least one of the students must qualify under the rules for the Midwestern disaster areas. None of the requirements in this paragraph will prevent any eligible student from claiming the lifetime learning credit. If you are eligible to claim the Hope credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both.

The Lifetime Learning Credit

With the Lifetime Learning Credit you may be able to claim up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all eligible students.

Unlike the Hope Credit, there is no limit on the number of years you can claim the Lifetime Learning Credit. It may be used for undergraduate and graduate courses and even for tuition and fees when your child is attending school less than half time. But, you can only claim the credit once per tax return no matter how many children you have enrolled in college at the same time.

The amount of your lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return).

Differences between the American opportunity, Hope, and lifetime learning credits.

There are several differences between these three credits. For example, you can claim the Hope credit based on the same student's expenses for no more than 2 tax years. The American opportunity credit can be claimed for the same student for no more 4 tax years, but any year in which the Hope credit was claimed counts toward the 4 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses.

More information on the availability of these credits can be found in IRS Publication 970: Tax Credits for Higher Education.