The most recent American Recovery and Reinvestment Act of 2009 provides some choices for the American taxpayer to choose certain education credits as compared to education deductions.

You can not take both, but you can take the best one for your tax situation.  The Hope Scholarship Credit is available for the first two years of educational expenses, while the Lifetime Learning Credit is available for all years of school.  The former allows for up to $1,800 per student, while the latter provides up to $2,000 per student.

The comparison of which one to take is found in the (1) amount of your income for 2008, (2) what type of student you are claiming the credit for, and (3) when you take the credit or deduction:

(1)  The above-mentioned credits phase out at relatively low income levels.  They phase out at $58K per year for Single taxpayers, and at $116k for Married taxpayers.  But the $4,000 deduction (different from the Hope and Lifetime credits) totally phases out at $80K for Single taxpayers, and at $160k for Married taxpayers.  So if you phase out for the credit, don’t forget about the deduction,

(2)  The Hope credit is available to students in their first two years of post-secondary school, while the Lifetime credit is available for any year the student is in school.  Make sure you apply the correct credit to the correct student in the correct year.  For example, to take both credits in the same year (maybe where the kid and the parent are both going to school), use one credit for the student in their first two years of undergraduate work (the Hope), and use the other credit for the student going back to school to enhance their career (the Lifetime).

(3)  If you know you have a payment coming up in January, you may consider making that payment early in December to take the credit or deduction in the year you pay the tuition, and then take another deduction or credit the next year for the same school year (when you make next semester’s payment).  Stick it to the government, is my motto.  Spreading tax deductions and credits across multiple years is a tax savings that few take advantage of… it takes some planning but can be very profitable.

Any other ideas on how to apply these tricks for the most benefit to the hard working American taxpayers?  Leave it in the comments.

Thanks, Jason M. Blumer

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.

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