Many adults will consider going back to school at some point in their lives. You may think about school if you're recently divorced and your standard of living has gone down. You may want more training in your current line of work to try and increase salary or obtain promotions.
If it's been some time since you were last in school, you may be surprised to learn there are federal government tax benefits to students of all ages. The details of the benefits are available in IRS Publication 970, Tax Benefits for Education. Take time to read the rules and make the most of these deductions and credits.
Scholarships and Fellowships
There are no age limits on federal financial aid. Students of all ages can benefit. From a tax perspective, scholarships and fellowships are tax free if the money is:
- Spent on qualified expenses, including tuition, fees, books, supplies and equipment
- Goes to someone pursuing a degree at an eligible college or university
American Opportunity Credit
There is a new tax credit available for the 2009 and 2010 tax years for college expenses. The American opportunity credit modifies the existing Hope credit (see below) by making it available to more taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four years. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for married couples filing a joint return). Once past the income limits, the credit phases out. These income limits are higher than prior limits of the Hope and Lifetime Learning credits. Special rules apply to college students in a certain Midwestern disaster area. For tax-year 2009 only, there's an expanded Hope credit (up to $3,600) or the American opportunity credit.
Hope Credit and Lifetime Learning Credit
The Hope Credit and the Lifetime Learning Credit, both introduced in 1998, are two tax credits to help pay educational expenses. The Hope Credit is generally for tax years 2008 and earlier. The credits have some similarities, including:
- Only qualified education expenses are covered
- Students must go to an eligible school
- You can claim either the Hope Credit or the Lifetime Learning Credit on your tax return, but may not both in the same year
- The credits reduce your total tax payment
- If you claim expenses as an educational deduction, you may not claim them as a credit
- The credit is phased out for those with a MAGI of $48,000 or more for 2008
The Hope Credit can be taken during the first 2 years of education after high school. The Hope Credit's value is up to $1,800 a year per student. Students must be enrolled at least half-time in a degree-earning program. Students with felony drug convictions aren't eligible.
The Lifetime Learning Credit allows taxpayers to take a $2,000 a year credit ($4,000 per year for students in Midwestern disaster areas) during a student's entire post-secondary education. This credit is also allowed for non-degree classes taken to improve a student's job skills. Students must be enrolled in at least one course a year to take the credit.