Last week I pointed to a few articles focused on how to pay for your own or your child's college education. Within these readings you'll find information about how to cut expenses, how to fund tuition, and how to deduct college expenses from your taxes. However, I neglected to talk about a few items, mainly in the taxes category. Since April 15th is just around the corner, now's the time to figure out whether Lifetime Learning Credits or Hope Scholarships are your choice for your 2005 returns.

Don't let the name, "Lifetime Learning Credits," lead you to believe that you have a lifetime to deduct tuition and other college expenses from your taxes. The IRS explains:

The Lifetime Learning Credit is?a nonrefundable tax credit up to a certain dollar amount per family for all undergraduate and graduate level education. The Lifetime Learning Credit is calculated by talking a percentage of the qualified educational expenses paid. This information is found in Publication 970, Chapter 3.

Chapter 3 explains that a person may be able to claim a Lifetime Learning Credit of up to $2,000 per year for qualified education expenses paid for all students enrolled in eligible educational institutions. In other words, if you have two children in college, you may be able to claim up to $2,000 for that year, period. What makes the lifetime learning credit earn its name is that there is no limit on the number of years the lifetime learning credit can be claimed. So, you could conceivably spend a lifetime deducting credits, especially if you have twelve children. The deductions depend upon whose lifetime you might consider when claiming this credit as well.

For instance, if Grandpa Gotbucks wants to pay for Sonny's tuition and makes a payment directly to the eligible college (the college of your choice would have information on whether it was "eligible" to participate in a student aid program administered by the Department of Education), Sonny cannot use the lifetime learning credit on his taxes if he's still a dependent on his parents' or guardians' tax forms. So, Sonny's parents or guardians could claim the credit, not Grandpa when Sonny isn't Grandpa's dependent.

Another issue for parents, guardians, and non-dependent students is that there's a ceiling on income for this deduction. If the household shows more than $50,000 per year income, then you can just bypass the Lifetime Learning Credit. Where the IRS is concerned, any money means income, including capital gains. And, while there's no limit to years to claim the deduction, there's a limit to the amount that a person can deduct over the years. From the IRS:

The credit is equal to 20 percent of the taxpayer's out-of-pocket expenses for qualified tuition and related expenses of all eligible family members, up to a maximum of $5,000 in expenses annually through 2002. Thus, the maximum Lifetime Learning Credit a taxpayer may claim through 2002 is $1,000. After 2002, the credit is equal to 20 percent of the taxpayer's out-of-pocket expenses up to a maximum of $10,000 in expenses. Thus, the maximum Lifetime Learning Credit a taxpayer may claim after 2002 is $2,000. The maximum credit does not change even if the taxpayer is claiming a credit for the expenses of more than one student in the family.

A person could not claim a lifetime learning credit if he or she decides to claim the Hope Scholarship Credit instead. Once again, the name for this tax break incentive is misleading, because this program is not a scholarship. In fact, if the student does receive a scholarship, then that student or his or her parents cannot claim either the Hope or Lifetime tax credits. For more information about the Hope Scholarship Credit, take a gander at the same IRS Publication 970, Chapter 2.

Generally, the difference between the Lifetime and Hope credits begin with the college year, as Hope credits may only be taken when the student is a college freshman or sophomore, whereas the Lifetime credits may be taken for any college year. Plus, parents, guardians, or non-dependent students may not claim the Hope credit if their income is over $53,000. But, the Hope credits may be taken separately for each student, rather than as a lump family sum as indicated by the Lifetime Learning credit. Otherwise, both tax credits are geared to furnishing relief for tuition, but not for books, sports, extra-curricular activities or anything else that isn't included in the college tuition.

Finally, for those who make more than $50,000 - $53,000 per year, the new Tuition and Fees Deduction could help. This deduction is an adjustment to income, and it can reduce the amount of income subject to tax by up to $4,000. Once again, this deduction is geared toward tuition rather than personal and living expenses. The Tuition and Fees Deduction cannot be claimed if the Hope or Lifetime Learning credits are used. Also, take note that this deduction doesn't apply to tuition and related expenses that have been paid with tax-free distributions from any 529 Plan or from a Coverdell ESA.

Is the work involved with all this computation worthwhile if a person considers the small amount credited on her taxes? That's a question you would need to ask yourself (or your tax-preparer) when it comes time to figure out your taxes. I can tell you from where I sit that the Lifetime Learning Credit proved beneficial for me during one year - the return paid for one semester's worth of textbooks (about $400). But, I was an adult, independent student with very little income. An adult who attends college along with a full-time job might receive more - at least enough for a full-year's supply of textbooks - but, then, when would he have time to study?

Until Next Week,
Linda Goin