Taxpayers with post-secondary school education expenses may be eligible for 2 different nonrefundable credits:
American Opportunity Credit (an enhanced version of the Hope Credit). You may be able to claim an American Opportunity Credit of up to $2,500 for 2010 for qualified education expenses paid for each eligible student. The credit is calculated in 2 parts and is equal to 100% of the first $2,000 of eligible expense and 25% of the next $2,000 in eligible expenses. This is a per-student limit, and it may only be taken for the first 4 years of higher education. This credit is 40% refundable.
Lifetime Learning Credit. You may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses that you paid. You can claim this credit only once per return, but there is no limit on the number of years the credit can be claimed.
Although, the Lifetime Learning Credit is limited to $2,000, you can claim as many students as are eligible until you reach a maximum of $10,000 in expenses. To claim this credit for multiple students, figure the expenses for each student, and then combine their expenses together. Since the total can’t be more than $10,000 and the credit is equal to 20% of the expenses, the maximum credit allowed is $2,000 (20% of $10,000).
To qualify for either credit, you must meet 3 different sets of eligibility requirements; eligible educational institution, eligible expenses, and eligible student.
An eligible institution for both education credits is defined as any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student financial aid program administered by the U.S. Department of Education.
Eligible expenses for both education credits include:
Tuition and fees required for enrollment or attendance in the course or program taken during the year, or to be taken within 3 months after the close of the year.
Expenses paid during the tax year for a course or program taken during the year, or to be taken within three months after the close of the year. This includes student-activity fees and expenses for course-related books, supplies, and equipment that must be paid to the school as a condition of enrollment and attendance at the school.
Eligible expenses for American Opportunity Credit include:
Books , supplies and equipment .These materials must be needed for a course of study. It doesn't matter if the materials were purchased from the school as a condition of enrollment or attendance.
Ineligible expenses for the education credits include:
Personal expenses for housing, meals, incidentals, transportation, medical expenses, and insurance.
Hobby, games, sports, or noncredit courses unless required as part of the program.
The credits have different definitions of "eligible student":
American Opportunity Credit. An eligible student must meet all the following requirements. The student must:
Carry at least half the normal full-time workload for the student’s course of study in at least one academic period during the year.
Be enrolled in a course of study that leads to a degree, certificate, or other recognized educational credential.
Not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope credit for the same student
Not have completed the first 4 years of higher education as determined by the institution
Not have been convicted of a felony offense for possessing or distributing a controlled substance.
Not have an AGI that exceeds the phaseout limits which are $80,000 for a single taxpayer or $160,000 for a married filing joinly taxpayer. The credit is completely phased out for single taxpayers with an AGI of $90,000 and $180,000 for married taxpayers filing a joint return.
Lifetime Learning Credit. Eligibility for this credit is not based on a student’s workload. A student who takes 1 or more courses is eligible. In addition, the credit isn’t limited to a student’s first 4 years.
Qualified expenses for the Lifetime Learning Credit also include the cost of courses that aren’t part of a degree or certificate program. Because of these differences, working adults who take occasional courses to strengthen their job skills can are eligible to claim this credit.
There are a few other requirements worth mentioning:
You can’t claim both the American opportunity credit and the lifetime learning credit for the same student. You also cannot use the same expense to claim the tuition and fees deduction.
You can’t claim either of these credits if you and your spouse file separate tax returns.
LifeTime Learning: If you’re filing a single or head of household return, the credits start phasing out at $50,000 and are totally eliminated at $60,000. If you and your spouse file a joint return, the credits start phasing out at $100,000, and are totally eliminated at $120,000.
American Opportunity Credit: If you’re filing a single or head of household return, the credits start phasing out at $80,000 and are totally eliminated at $90,000. If you and your spouse file a joint return, the credits start phasing out at $160,000, and are totally eliminated at $180,000
For more information, see these resources:
Interview for Form 8863
Form 8863