There is good news for taxpayers considering pursuing
a college degree or taxpayers who are already
footing the costs of higher education for themselves
or a dependent. Two credits are available to
taxpayers that will offset some of the costs;
they are the Hope Credit and the Lifetime Learning
Credit.
The Hope Credit applies only for the first two
years of post-secondary education, such as college
or vocational school, and it can be worth up
to $1,500 per eligible student, per year. It
does not apply to graduate and professional-level
programs. The Hope Credit allows taxpayers a
100% credit for the first $1,000 (increased to
$1,100 in 2006) of qualified tuition expenses
and a 50% credit for the second $1,000 of qualified
tuition expenses.
An eligible student for the Hope Credit must meet
all of the following criteria: 1) has not elected
to claim the Hope Credit in any two earlier years;
2) has not completed the first two years of postsecondary
education before the beginning of the current
tax year; 3) is enrolled at least half-time in
a program that leads to a degree, certificate,
or other recognized educational credentials,
and; 4) has not been convicted of any Federal
or State felony class drug offense for possession
or distribution.
The Lifetime Learning Credit applies to undergraduate,
graduate and professional degree courses, including
instruction to acquire or improve job skills.
The Life Time Learning Credit equals 20% for
the first $10,000 of post secondary tuition and
fees taxpayers pay during the year for all eligible
students, for a maximum credit of $2,000 per
tax return.
The allowable amount of the credits is reduced
for taxpayers who have modified adjusted gross
income (MAGI) above certain amounts. The phaseout
of the credits begins for single taxpayers in
2005 when MAGI reaches $43,000 and completely
phases out when MAGI reaches $53,000. For joint
filers, the phaseout of the credits begins at
$87,000 and completely phases out when MAGI reaches
$107,000.
There is an “above the line” deduction
available for taxpayers affected by the phaseout.
Taxpayers can deduct a maximum of $4,000 of qualified
tuition and related expenses paid for the taxpayer
or the taxpayer’s dependent for AGI amounts
under $65,000 for single filers and $130,000
for joint filers. Taxpayers can deduct $2,000
for AGI amounts under $80,000 for single filers
and $160,000 for joint filers. No deduction is
available for single filers with AGI amounts
greater than $80,000 and joint filers AGI amounts
greater than $160,000.
Both credits may be claimed by the parent or the
student, but not by both. However, if the student
was claimed by the parent as a dependent, the
student cannot claim the credit. Also, taxpayers
cannot claim both credits on the same student
in the same year.
If taxpayers file an Arkansas income tax return,
an itemized deduction is available for qualified
tuition expenses. Taxpayers with qualified tuition
expenses are allowed an itemized deduction for
the lesser of 50% of the tuition expense or 50%
of the "weighted average tuition" as
determined by the Arkansas Department of Finance
and Administration each year. The “weighted
average tuition” for 2005 are as follows:
$1,919 for 2 year colleges, $4,949 for 4 year
colleges, and $1,153 for technical institutions.
Taxpayers should consult their tax advisor to
maximize the savings on college related expenses.
Tax topic is provided by Jeremy Watson, CPA, Jones & Company,
Ltd., Paragould.
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