Is higher education costing you a fortune? There may be a way to help pay for
those costs with the help of education tax credits. What are education credits,
who is eligible, and why should we take them? Well, let's start with the first
part of the question, and work our way to the end. Education credits are tax
credits available for qualified education expenses paid by the taxpayer in the
furthering of their education.

Qualified education expenses are defined as an expense paid during the tax
year for tuition and fees required by an eligible educational institution for
student enrollment and attendance. It really doesn't matter how you pay these
expenses, only that the expenses are valid. Now, let's give some examples of
expenses that are not qualified so that you can determine those that are
qualified, and how you account for these expenses.

Room and board, medical expenses, student health fees, transportation,
personal living expense, insurance, course-related books, supplies, equipment,
or any non-academic activity or non-credit course are not qualified expenses.
What does this leave? Basically: tuition and fees required for enrollment or
attendance at an accredited college, university, vocational or post secondary
educational institution.

If you take a tax deduction for education expenses in any other area of the
personal tax return, you cannot use that expense when figuring a Hope or
Lifetime Learning credit. If you received tax-free assistance, such as a Pell
Grant or scholarship, you must deduct that amount from your qualified expenses;
however, most scholarships and Pell grant monies are taxable, so you may be
taxed, but you can also get the tax credit. If you make any prepayments of
tuition, you can use the prepaid amounts on your current year's federal income
tax return, provided you have followed all other guidelines.

Now, there are two different tax credits: the Hope credit and the Lifetime
Learning credit. What are their differences? Well, first you cannot take them
jointly; you must choose one or the other. The Hope credit can only be taken
during the first two years of college, as defined by the educational
institution, enrolled at least half time and cannot exceed $1500. The Lifetime
Learning Credit maximum for 2005 is $2000.

This credit can be used for undergraduate, graduate and professional degrees
courses. It is not based on a student's school workload which means it is
allowed for one or more courses at an eligible school. It cannot be taken in
conjunction with the Hope Credit, even if your expense exceeds the Hope
limitations. If your expenses exceed the Hope limitation the first two years,
simply include the excess on your Schedule A. Your tax credits are also limited
by your level of income, and your adjusted gross income totals. The higher the
income the less tax credit the taxpayer receives.

Credits could be reduced depending on your level of income and how you file,
i.e. single, married, etc. So, when figuring these tax credits, you need to
consider your current student status, your income levels, and your expense
levels as Hope will expire after your second year of higher education. You can
take any excess expense deductions under your itemized deduction expenses on
Schedule A, when Hope or Lifetime Learning is at their maximums. On a side note,
you can not claim either credit for a student named as a dependent on your tax
return if you used the Tuition and Fees Adjustment for that same student so it
is always advisable to seek professional tax help.

Who is eligible to take these tax credits? You are eligible as a taxpayer or
eligible dependent of a taxpayer that was enrolled as a student in an eligible
educational institution. If you can be claimed as someone's dependent, they will
be able to claim the education credit, not the dependent.

Generally, dependent students' expenses will be claimed by their parents or
legal guardians. Now, here is an interesting note: if you are a student, and you
cannot be claimed as someone's dependent, only you can take the education
credit; even if you are not the person paying the expense.

Why would you take the credit? I think a better question would be why would
you not take the credit? In case you haven't noticed, it can be very expensive
to attend higher education classes. For anyone seeking to further their
education, receive a degree, and pursue their dream, any federal income tax
credit that can be taken, is a helping hand toward achievement of that dream.

Today, without furthering your education, you're almost positively sentenced
to a lifetime of minimum wage earnings, and struggling to make ends meet. A
college education is the fastest route still, to a better life, better wages,
and the achievement of the American Dream.