Tax Credits & Deductions

Hope Credit
You can claim a Hope Credit only for an "eligible student." An "eligible student" is a student who:

• As of the beginning of the year, has not completed the first two years of post–secondary education (that is, generally is a freshman or sophomore in college).
• Is available only for 2 years per eligible student
• Is enrolled in a program that leads to a degree, certificate, or other recognized educational credential, for at least one academic period beginning during the year.
• Is taking at least one–half of the normal full–time workload for the student's course of study for at least one academic period beginning during the calendar year, and
• Is free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the year.

An eligible student can be you, your spouse, or your dependent for whom you claim an exemption. The maximum Hope Credit is $1,500 for each eligible student.

The Hope Credit is gradually reduced if your modified adjusted gross income is between $43,000 and $53,000 ($87,000 and $107,000 in the case of a joint return). The credit cannot be claimed if your modified AGI is $53,000 or more ($107,000 or more in the case of a joint return).

Lifetime Learning Credit
You are allowed a Lifetime Learning Credit of 20% of the first $10,000 you paid for qualified tuition and related expenses for yourself, your spouse, or your dependent for whom you claim an exemption. The maximum amount of credit you can claim for 2005 is $2,000 (20% of $10,000) for all students in the family.

The Lifetime Learning Credit is not based on the student's workload. It is allowed for one or more courses that the student takes at an eligible educational institution. The credit is not limited to students in the first two years of post–secondary education. Expenses for graduate–level degree work are eligible. However, to be eligible for the credit, the student must be taking course work in order to acquire or improve job skills. There is no limit on the number of tax years for which the Lifetime Learning credit can be claimed for each student. The amount you can claim as a credit does not increase based on the number of students for whom you pay qualified expenses.

The Amount of the Lifetime Learning Credit is gradually reduced if your modified adjusted gross income is between $43,000 and $53,000 ($87,000 and $107,000 in the case of a joint return). The credit cannot be claimed if your modified AGI is $53,000 or more ($107,000 or more in the case of a joint return).

Tuition & Fees Deductions
Generally, you cannot deduct education and training expenses for yourself, your spouse (if married) or your dependent as a business expense unless the education or training:

• Maintains or improves a skill required in a trade or business you are currently engaged in,
  
  
• Meets the express requirements of your employer, or

• Meets the requirements of law or regulations which are conditions of continuing your employment.
  

You may be able to deduct qualified education tuition and related expenses that you pay. You do not have to itemize to take this deduction. For tax year 2005, you can claim your education expenses either as an adjustment to income or as a Hope or Lifetime learning credit. Qualified expenses are the same as for the Hope and Lifetime learning credit. Refer to Publication 970, Tax Benefits for Education.

You cannot deduct higher education expenses on your income tax return and also claim a Lifetime learning credit based on those SAME expenses. Nor can you claim both the Hope and Lifetime learning credit in the same year for the same expenses.

The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 in 2005. This deduction is taken as an adjustment to income, which means you can claim this deduction even if they do not itemize deductions on Schedule A of Form 1040. This deduction may benefit taxpayers who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.

Up to $4,000 may be deducted from tuition and fees required for enrollment or attendance at an eligible post secondary institution. Personal living and family expenses, including room and board, insurance, medical and transportation, are not deductible expenses.

The exact amount of the Tuition and Fees Tax Deduction depends on the amount of qualified tuition and related expenses paid for one's self, spouse, or dependent for whom the taxpayer can claim an exemption.

The amount of qualified education expenses that can be deducted through the Tuition and Fees Deduction remained level for the 2005 tax year at $4,000 for taxpayers with a Modified Adjusted Gross Income (MAGI) of $65,000 or less ($130,000 or less for married couples filing jointly). The maximum Tuition and Fees Deduction is $2,000 for taxpayers with a MAGI greater than $65,000 ($130,000 for married couples filing jointly), but not greater than $80,000 ($160,000 for married couples filing jointly). Taxpayers with a MAGI greater than $80,000 ($160,000 for married couples filing jointly) are not eligible for this deduction.

Interest Deductions
You may be able to deduct up to $2,500 for interest you pay in 2005 on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040 (PDF).

You cannot claim the deductions if:

• Another taxpayer claims an exemption for you as a dependent,
• Your filing status is married filing separately, or
• You are not legally obligated to make payments on the loan.

A qualified student loan is a loan you took out to pay qualified expenses. The expenses must have been:

• For you, your spouse, or a person who was your dependent when you took out the loan,
• Paid or incurred within a reasonable time before or after you took out the loan, and
• For education furnished during a period when the recipient was an eligible student.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. These costs include tuition, fees, room and board, books, equipment, and other necessary expenses, such as transportation.

Costs you incur have to be reduced by:

• Non–taxable employer – provided assistance benefits,
• Non–taxable distributions from an education IRA,
• U.S. Savings Bond interest that is non–taxable because you paid qualified higher education expenses,
• Qualified scholarships that are non–taxable,
• Veterans educational assistance benefits, and
• Any other non–taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

The student must have been enrolled in a degree, certificate, or other program leading to a recognized educational credential at an eligible educational institution and must have carried at least one half of a normal full–time work–load for the course of study being pursued.

The deduction will start to phase out when modified AGI exceeds $50,000 ($105,000 if married filing jointly or qualifying widow(er). You cannot take a student loan interest deduction if your modified AGI is $65,000 ($135,000 if you file a joint return) or more.

Other Benefits

Education IRA - Education Individual Retirement Accounts can be established for individuals under the age of 18. The earnings accumulate in the account tax-free. Withdrawals are tax free to the extent that they are used for expenses of higher education for the individual. Visit www.irs.gov for information on contribution limits and other details.

IRA Withdrawals - Withdrawals can be made from an IRA or the new Roth IRA by persons under the age of 59 1/2 without the 10% early withdrawal penalty if the funds are used to pay higher education expenses. Visit www.irs.gov for details.