Here's some advice from the National Tax Advice Day Web site on education credits you can apply on to your income tax:
The Hope credit and lifetime learning credit are two tax credits available to help pay for college for you, your spouse, or your dependent. A tax credit provides a dollar-for-dollar reduction in the amount of federal income taxes that you owe.
For example, if you owe $2,000 in income taxes and have a $1,000 tax credit, you cut your tax bill in half. In general, you cannot receive a refund for the portion of a tax credit that exceeds the amount of federal income taxes that you paid.
The Hope credit can be used for expenses incurred in the first two years of college, up to $1,500 per qualified student, per year.
The lifetime learning credit applies to tuition costs for undergraduates, graduates, and those improving job skills through a training program. This credit can be used for 20% of up to $10,000 in qualified expenses per year (no matter how many qualifying students you claim).
You can receive tax-free distributions from education savings accounts (ESAs) or QTPs without affecting your use of the Hope or lifetime learning credit. The only stipulation is that you don't claim the credit for expenses that you pay with these tax-advantaged accounts. (Distributions from an ESA or QTP are excluded from income when calculating the credit.) You must complete IRS Form 8863: "Education Credits" if you use either credit.
To help you calculate your credit, the IRS requires the school that you attend to mail a Form 1098T: "Tuition Payments Statement" by Feb. 1.
Use of the Hope credit and lifetime learning credit phases out at higher incomes. For taxpayers filing a single return, the tax credits begin to phase out when modified adjusted gross income (MAGI) reaches $43,000. For couples filing a joint return, the credits begin to phase out when income reaches $87,000. These credits phase out completely when income reaches $53,000 for single persons, and $107,000 for married persons filing a joint return.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
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