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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Get Smart: Earn Tax Credits for Education

Attending college or taking courses not only makes you smarter, it may also save you valuable tax dollars. Two tax credits – the Hope Scholarship Credit and the Lifetime Learning Credit - are available to many middle-income taxpayers. According to the New Jersey Society of Certified Public Accountants (NJSCPA), these credits reduce your tax bill dollar for dollar, making them more valuable than deductions, which reduce the amount of income on which you are taxed. Basically, a $1,000 tax credit saves you $1,000 in taxes.

Hope Scholarship Credit for Students Starting Out
Available since January 1, 1998, the Hope Credit equals 100 percent of the first $1,000 paid for qualified tuition and fees, plus 50 percent of the next $1,000, for a maximum tax credit of $1,500 per year. The Hope Credit is available to eligible students in the first two years of college or vocational school. To be eligible, the student must carry at least one-half the normal full-time workload for the course of study he or she is pursuing. Charges associated with room, board, books, equipment, or living expenses are not eligible.

For 2002, the Hope Credit is phased out for joint filers who have between $82,000 and $102,000 of adjusted gross income (AGI) and for single filers who have between $41,000 and $51,000 of AGI. Married taxpayers must file jointly to claim the credit.

Lifetime Learning Tax Credit Doubles in 2003
The less restrictive Lifetime Learning Credit lives up to its name. It targets not only college, graduate, and professional students, but also adults going back to school or taking courses to improve or update their skills. Students do not have to carry a minimum course load to be eligible, and there is no limit on the number of years the credit can be used.

For 2002, a family could claim a 20 percent tax credit for the first $5,000 of qualified tuition and fees. In 2003, the maximum amount of qualified tuition and expenses doubles to $10,000, which means that the maximum Lifetime Learning Credit is $2,000 per return, up from $1,000 in 2002. Keep in mind that, unlike the Hope Credit, which can be claimed for each qualifying person, the top Lifetime Learning Credit is determined on a family basis. Regardless of how many family members are taking courses, the maximum credit is $2,000.

The Fine Points are Important
You cannot take both the Hope and Lifetime Learning Credits for the same student in the same tax year. However, as a result of a recent change to the tax law, which took effect in 2002, you now can take the Hope and Lifetime Learning Credits in the same year that you take a distribution from an Education IRA or make a tax-free withdrawal from a state-sponsored Section 529 plan. Just be sure that the distribution isn’t used for the same expenses for which the credit is claimed.

An Alternative Tax Break for Higher Income Taxpayers
Taxpayers with incomes too high to benefit from the Hope or Lifetime Learning Credits may be able to get help from a new tax deduction for college tuition that became available in 2002. You can deduct up to $3,000 of college tuition and fees for you, your spouse, or any other person you can claim as a dependent on your tax return, if your AGI doesn’t exceed $65,000 for single and $130,000 for joint filers. The $3,000 is the annual maximum, regardless of how many students in your family qualify. The tuition deduction may be claimed whether or not you itemize your deductions.

A CPA Can Walk You Through the Education Tax Credit Process
The regulations and restrictions governing education tax credits can be complex. You may wish to consult with a CPA to verify your eligibility and to determine the best strategies for you. And, finally, you should be aware that the education credits can be used only to offset taxes you owe. If you don’t owe any income tax, you won’t get a rebate for these credits.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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