What are Education Tax Credits?

Education tax credits provided by the Internal Revenue Service (IRS) in the US are designed to offset the costs of tuition and expenses for higher education. These credits cannot be claimed simultaneously by one student in any given year. Instead, each is designed to meet specific circumstances. As of 2011, the two tax credits available include the Hope tax credit and the Lifetime Learning tax credit. The Hope or American Opportunity tax credit is targeted towards general post-secondary education for students who have not yet completed their first two years of college. By contrast, the Lifetime Learning tax credit is available to any student at either the undergraduate or graduate level.

Both the Hope and Lifetime Learning education tax credits were created by the Taxpayer Relief Act of 1997, and were intended to make college available to a new generation who otherwise might not be able to afford it. These education tax credits are targeted at moderate- to low-income individuals, with the Hope credit's primary intention being that of making the first two years of college affordable, and the Lifetime Learning credit making the prospect of returning to school later in life feasible. Since the Lifetime Learning credit is targeted beyond the first two years of college, it is assumed those who would take advantage of it would already have a significant income. As of 2011, the Lifetime Learning credit is, therefore, only available to students making less than $57,000 per year, and its benefits begin to be phased out at the $47,000-per-year income level.

As of 2011, maximum benefit derived from the Hope credit by law, per year, is $2,500, or $3,600 if a student can provide evidence of residence in a qualified Midwestern disaster area. The IRS defines a Midwestern Disaster Area in a 2008 bulletin as several counties in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin that were affected by floods, tornadoes, and severe storms. As well, counties in Louisiana and Texas that were affected by Hurricane Ike at the time have also been included in the list.

Calculating the Lifetime Learning credit follows a different approach, and is based instead on a percentage of qualified educational expenses that the student has paid. As of 2011, for students beyond their first two years of college, it is calculated as 20% of the first $10,000 of tuition and fees for a maximum credit of $2,000 in any year. The Lifetime Learning credit offers more flexibility than the Hope credit, however, in that it can also be claimed by a spouse of a student or a taxpayer who has a dependent that is a student. This credit can also be claimed for more than one student at a time, because it is calculated based on a per-family rather than per-student income basis.

Another limitation of education tax credits is that they, in some cases, cannot be claimed repeatedly. The Hope credit was designed for the first two years of post-secondary education, but has now been superseded by the American Opportunity Credit, which essentially falls under the same IRS legal definition for education tax credits. The American Opportunity credit, however, is now available for the first four years of undergraduate education. To foster higher education incentives for returning students and people wishing to re-train for new job markets, the Lifetime Learning credit has no limitation on how many years it can be claimed, and it is instead based primarily on yearly income levels for qualification.