Tax Breaks for Students
Spring has arrived— and so has the 2007 tax season. If you're enrolled in a higher education program, you'll be glad to know that the IRS offers a number of tax breaks for students. These include:
Plus, see the "Tax Break Tips" for useful definitions and information.
Credits vs. Deductions for 2007 Taxes
The first two benefits are credits, which reduce your income tax after you've calculated it. The second two benefits are deductions, which allow you deduct certain education expenses from your income before you calculate your tax.
Tax Credit: Figure out your tax first
To use either the Hope Credit or the Lifetime Learning Credit, you first have to figure out how much tax you owe, then subtract the credit you're eligible for from that tax amount.
Income Deduction: Deduct your expenses first
To use either the Tuition and Fees Deduction or Student Loan Interest Deduction, you deduct your eligible school expenses from your income first, before you calculate how much tax you owe. Like other expenses you may deduct from your income, such as rent, property taxes, or medical expenses, the education deductions reduce your income, which could lower the amount of income tax you'll owe.
Because the credits directly offset your tax dollar for dollar, rather than merely reducing your income, they may provide the bigger benefit. Spend some time adding up your education expenses so you can figure out what will lower your tax the most, credit or deduction. (You can't use both for the same student in the same year.)
Don't miss out on the Student Loan Interest Deduction
If you've completed your education program but still have a student loan to pay off, be sure to take advantage of the student loan interest deduction.
The Hope Credit
Education Requirements. To claim the Hope credit, the student must be:
- in the first or second year of school,
- in an undergraduate program that will result in a degree, certificate, or other recognized education credential, and
- enrolled at least half-time for at least one academic period during the tax year— in this case, 2007.
The student can be you, your spouse, or a dependent you claim as an exemption on your tax return.
Credit Amount. The maximum amount of the Hope Credit for 2007 is $1,650 per each eligible student per year, but only during the first two years of college or vocational school. There is no limit to the number of students in one family who can claim a Hope credit. (Note: In the Gulf Opportunity Zone in portions of Alabama, Louisiana and Mississippi, the credit is $3,300 per student.)
How the Hope Credit is calculated. The Hope Credit is awarded for 100% of the first $1,100 and 50% of the next $1,100 of qualified expenses, which include tuition, fees, and certain other education requirements.
Income limit. The Hope Credit is reserved for taxpayers whose adjusted gross income (AGI) is $57,000 or less ($114,000 or less if you file a joint return). If your AGI is between $47,000 and $57,000, you may not be eligible for the full $1,650. Also, this credit is nonrefundable, which means that it can reduce the tax you owe to zero, but if your credit turns out to be more than the tax you owe, you don't get that extra refunded to you.
Lifetime Learning Credit
Education Requirements. The Lifetime Learning Credit has fewer education restrictions than the Hope Credit.
- Any student paying qualified tuition and related expenses at an authorized postsecondary education institution is eligible. The student can be you, your spouse, or a dependent child.
- The education expenses are not restricted to undergraduate programs. Graduate and continuing education programs are also eligible.
- The half-time enrollment minimum does not apply. Even one course is enough to qualify for the credit.
- Eligibility is not restricted to the first two years of school. You can claim a Lifetime Learning Credit every year you're in school.
Unlike the Hope Credit, however, there is just one Lifetime Learning Credit allowed per family.
Credit Amount. For 2007, the maximum amount of the Lifetime Learning Credit is $2,000 per tax return. (Note: In the Gulf Opportunity Zone in portions of Alabama, Louisiana and Mississippi, the Lifetime Learning Credit maximum is $4,000 per student.)
How the Lifetime Learning Credit is calculated. The Lifetime Learning Credit is awarded for up to 20% (40% for Gulf Opportunity Zone students) of the first $10,000 of education expenses paid for all eligible students in a family.
Income limit. The Lifetime Learning Credit is reserved for taxpayers whose adjusted gross income (AGI) is $57,000 or less ($114,000 or less if you file a joint return). If your AGI is between $47,000 and $57,000, you may not be eligible for the full $2,000.
Comparing the Hope Credit and the Lifetime Learning Credit
| Hope Credit | Lifetime Learning Credit |
|---|---|
| Up to $1,650 credit per eligible student per year | Up to $2,000 credit per tax return |
| Can only be used for the first 2 years of college or vocational school | Available for all years of postsecondary education and for courses to acquire or improve job skills |
| No more than 2 years, total, per eligible student | Available for an unlimited number of years |
| Student must be pursuing an undergraduate degree or other recognized education credential | Student does not need to be pursuing a degree or other recognized education credential |
| Student must be enrolled at least half time for at least one academic period beginning during the year | Available for one or more courses |
| No felony drug conviction on student's record | Felony drug conviction rule does not apply |
Tuition and Fees Deduction for 2007 Taxes
Qualifying Expenses. Education expenses eligible for the tuition and fees deduction include tuition and related fees required for the student's enrollment or attendance at an eligible postsecondary educational institution. Expenses don't include room and board or other personal, living, or family expenses. The student can be you, your spouse, or a dependent you claim as an exemption on your tax return.
Income Deduction Maximum. The maximum tuition and fees deduction in 2007 is $4,000, but your actual deduction depends on your income. You may only be able to deduct $2,000.
How the Tuition and Fees Deduction is calculated. The Tuition and Fees Deduction is based on modified adjusted gross income (MAGI). If your MAGI is:
- less than $65,000 ($130,000 if you are married filing jointly), you can deduct up to $4,000 in education expenses
- between $65,000 ($130,000, if married filing jointly) and $80,000 ($160,000 if married filing jointly), you can deduct up to $2,000 in education expenses
Income limit. Because the income limit for this deduction, $80,000, is much higher than that of the two Credits, the deduction may work for you if your income is too high to allow you to claim the Hope Credit or Lifetime Learning Credit.
Student Loan Interest Deduction for 2007 Taxes
If you took out student loans, you may be able to deduct up to $2,500 in interest paid per year.
Qualifying Expenses. To qualify for using the deduction, you had to have paid $600 or more in interest on a qualified student loan, and you have to have used the loan money for qualified higher education expenses, including tuition, fees, room, board, supplies, and other related expenses. The student can be you, your spouse, or your dependent.
Deduction Limit. The maximum amount of the Student Loan Interest Deduction for 2007 is $2,500 per each eligible student per year.
Income limit. The Student Loan Interest Deduction is reserved for taxpayers whose AGI is less than $65,000 ($135,000 if filing jointly).
Tax Break Tips for 2007 Taxes
Tax breaks are for taxpayers. Only people who pay taxes are eligible for the Hope Credit, Lifetime Learning Credit, Tuition and Fees Deduction, or Student Loan Interest Deduction.
Be prepared. Collect all your education expense receipts so you have them handy when doing your taxes.
IRS Forms you'll need:
- 1098-T: Your school (if it's accredited) should send you one at the start of each year. The 1098-T tells the IRS what the school billed you, payments they received from you, and other details related to your enrollment.
- 8863: To calculate your education tax credits and report them on your 1040.
- 1098-E: Student Loan Interest Statement, which you'll receive if you paid $600 or more in interest on a qualified student loan during the year.
No doubling up on benefits. In any one year, you can only claim the Hope Credit OR the Lifetime Learning Credit OR the Tuition and Fees deduction for the same student. You can't claim all three, or even two out of the three. Just one credit or deduction for each student, and in the case of the Lifetime Learning Credit, only one credit for each family.
Eligible schools defined. To be eligible for the credits or the tuition and fees deduction, the school you attended has to be an eligible educational institution, which the IRS defines as any college, university, vocational school, or other postsecondary educational institution eligible for federal financial aid from the U.S. Department of Education. In other words, virtually all accredited public, nonprofit, and for-profit postsecondary institutions.
Academic period defined. An "academic period" is a semester, trimester, quarter, or other period of study (such as a summer school session) that began in 2007 or in the first 3 months of 2008.
Qualified expenses defined. "Qualified expenses" typically include tuition, fees, and some related expenses. "Related expenses" include some student participation fees and money for course-related books, supplies, and equipment, but only if the fees and expenses must be paid to the school as a requirement of enrollment or attendance. "Qualified tuition and related expenses" are the same for the Hope Credit and the Lifetime Learning Credit.
Unfortunately, even if the school requires you to have the following items as a condition of enrollment or attendance, the IRS does not allow you to count them qualified education expenses. They are:
- Insurance
- Medical expenses (including student health fees)
- Room and board
- Transportation expenses
- Personal living or family expenses
Funding Sources. Education expenses that you paid with money from these sources count as qualified expenses:
- Student loan (financial aid)
- Earnings or wages
- Gifts of money
- An inheritance
- Personal savings
But, education expenses that you paid with tax-free student assistance cannot be counted as qualified expenses. Tax-free funds include:
- The tax-free parts of scholarships and fellowships
- Pell grants
- Employer-provided tuition assistance
- Veterans' education funding
Beware all-in-one "bundled" charges on your school bill. Some schools combine all of their fees for an academic period into one amount. To allow you to claim an education credit if you're eligible, though, the school is required to provide you with an itemized bill or record of payment so that you can determine which fees are the qualified expenses and which are not.
Source: U.S. Internal Revenue Service, IRS online
Please note: This article is intended to be a general overview of education tax benefits for the tax year 2007. Course Advisor Inc. and CourseAdvisor.com as an institution does not advise on any personal income tax requirements or issues. Use of any information from this web site is for general information only and does not represent personal tax advice either express or implied. You are encouraged to visit the IRS website for more information and to seek professional tax advice for personal income tax questions and assistance.
Lisa Ruffino is CourseAdvisor's Editorial Director.