Tax Credits - Forms, Links, & Help

Tax Incentives For Higher Education Expenses (IRS web site)
Notice 97-60, the Taxpayer Relief Act of 1997, established tax incentives for certain higher education expenses. This Notice contains questions and answers on the Hope Scholarship Credit and Lifetime Learning Credit, a deduction for student loan interest, and creating Education Individual Retirement Accounts.

IRS Publication 970
Tax Benefits for Education for use in preparing tax returns.

IRS Form 8863
The form to use to claim Hope and/or Lifetime Learning Tax Credits.

Hope Scholarship Credit
Beginning January 1, 1998, taxpayers may be eligible to claim a non refundable Hope Scholarship Credit against their federal income taxes. The Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer's family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who is enrolled at least half-time in one of the first two years of post secondary education and who is enrolled in a program leading to a degree, certificate, or other recognized educational credential. The amount that may be claimed as a credit is generally equal to: (1) 100 percent of the first $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and related expenses, plus (2) 50 percent of the next $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the enrollment criteria described above.

Lifetime Learning Credit
Beginning on July 1, 1998, taxpayers may be eligible to claim a non refundable Lifetime Learning Credit against their federal income taxes. The Lifetime Learning Credit may be claimed for the qualified tuition and related expenses of the students in the taxpayer's family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who are enrolled in eligible educational institutions. If the taxpayer is claiming a Hope Scholarship Credit for a particular student, none of that student's expenses for that year may be applied toward the Lifetime Learning Credit.

Tax-Free Benefits
Certain payments or special programs’ distributions are free of tax when used for qualifying educational expenses. Such expenses cannot duplicate one another or be used to claim education credits or deductions.

Scholarships, fellowships, etc.
Generally tax-free when used to pay qualified expenses for degree candidates at eligible schools.

Coverdell Education Savings Account (ESA)
Distributions that don’t exceed the beneficiary’s qualified education expenses aren’t taxed. Unlike the items listed below, primary or secondary school expenses are eligible for ESA benefits. Beneficiary must be under age 18 when an ESA contribution is made; annual contribution limit is $2,000 and is reduced if contributor’s income is between $95,000 and $110,000 ($190,000 and $220,000, joint return).

Qualified Tuition Program
distributions from state- or educational institution-sponsored programs aren’t taxed to the extent used for qualified education expenses.

Education Savings Bond
interest on qualified U.S. Savings Bonds is tax-free if proceeds are used to pay qualified education expenses and income is under $59,850 ($89,750, joint return). The exclusion phases out as income rises to $74,850 ($119,750, joint return).

Employer-provided educational assistance
employers can give up to $5,250 in tax-free benefits each year; courses do not have to be work-related.

Cancelled student loan
although a cancelled debt is usually taxable, a student loan may not be if the cancellation depends on you working for a certain time in a specified occupation for a section 501(c)(3) organization.

Tax Deductions — lower your taxable income with these breaks

Tuition and Fees Deduction
for a student for whom no education credit is claimed. Qualifying expenses must not have been paid with any other tax-free benefit. A maximum deduction of $4,000 if taxpayer’s income does not exceed $65,000 ($130,000 on a joint return); $2,000 maximum if income is between $65,000 and $80,000 (between $130,000 and $160,000, joint return).

Deduction for work-related education
claim costs of education required to keep your job or to maintain or improve skills needed in your present work, but not if the education is needed to meet the minimum requirements of your position or is part of a program to qualify you for a new trade or business.

Student loan interest deduction
maximum deduction of $2,500 for interest paid on qualified student loans. Phases out as income rises from $50,000 to $65,000 ($100,000 to $130,000, joint return).

Tax Exception — The additional 10% tax on an early distribution from an IRA does not apply up to the amount of qualified education expenses. (The regular income tax still applies to any taxable IRA distribution.)

How to read your 1098 - T Form
You can get the general instructions from the IRS Web Site at www.irs.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Here are the instructions on the reverse of the 1098 - T.

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