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Federal Tax Benefits Help You Pay for College

Scholarships, Fellowships, Grants and Tuition Reductions

Scholarships and fellowships for undergraduates and graduate students are
tax free as long as the student is a candidate for a degree at an eligible
institution and they use the scholarship, fellowship, or grant to pay for
qualified educational expenses. Qualified expenses include tuition, fees
and certain course related expenses. Taxable expenses include room and
board, research, travel, and clerical help.

The Hope Credit

The Hope Credit may allow a student to turn a portion of their higher education expenses into tax savings. The Hope Scholarship enables taxpayers to take up to $1,500 in tax credit for payment of qualified education expenses for the first two years of undergraduate education at eligible colleges and universities. The expenses must have been paid during the academic year when the student was enrolled with at least half-time status. The amount that the taxpayer can claim decreases as adjusted income increases.

According to Doedtman, the Hope credit is per student. If you are married and filing jointly, and are both freshmen or sophomores, then you could be eligible for up to a $3,000 credit. To take advantage of the credit, however, a taxpayer may not have had a felony drug conviction on their record.

Karen Chan, Extension Educator from the University of Illinois Extension, Urbana in Illinois said students should remember that the Hope credit is only available for the first two years of postsecondary education. That means that it will generally be used when you are a freshman or sophomore. Chan advised students to definitely use the Hope Credit if it is available instead of the Lifetime Credit because it will give you a bigger credit for the same amount of expenses. If you failed to claim the credit last year, you can file an amended tax return for up to three years after your original filing date. Filing an amended return can help you get a refund of hundreds of dollars or even more, Chan said.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit allows a student to claim a tax credit for up to $2,000. The credit amount is 20 percent of qualified expenses up to $10,000, or $2,000. Eligible students must be enrolled in at least one course, but do not need to be pursuing a degree. Eligible students include undergraduate students in their junior or senior year and graduate students. Nondegree U.S. citizens who take courses to improve or acquire job skills can also claim this credit. The amount that the taxpayer can claim decreases as adjusted income increases.

“If you are an adult who is taking classes but you aren’t working toward a
degree, this credit will probably work for you,” said Chan.

Deduction for Higher Education Expenses

Taxpayers can take a deduction for higher education expenses at the
undergraduate or graduate level. In 2004 and 2005, the maximum deduction
was $4,000 per year. This deduction is available for qualified taxpayers
who did not qualify for the Hope or Lifetime Learning credit.

Chan advises that 2005 is the last year this is available, so you can claim
it on your 2005 tax return. “On your 2005 return, calculate your taxes with
this deduction and then with either the Hope or Lifetime Learning credit to
see which one gives you the lower tax. If your income is too high to use
the Hope or Lifetime, you may still qualify for Higher Education Expenses,”
Chan explained.


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