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Education Credits and Other Tax Provisions

These credits can give you an extra boost at tax time.

Susan T. Bart, 01/29/2010

College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to advisorquest@morningstar.com.

There are currently two education tax credits: the American Opportunity Credit (the revamped Hope Scholarship Credit) and the Lifetime Learning Credit.

American Opportunity Credit
The American Opportunity Credit is 100 percent of qualified tuition and related expenses ("QTREs) not in excess of $2,000 plus 25 percent of those expenses that exceed $2,000 but do not exceed $4,000. Thus for 2010 the maximum American Opportunity Credit is $2,500.

In 2010, the American Opportunity Credit will begin to be phased out when a taxpayer's modified adjusted gross income is in excess of $80,000 ($160,000 for a joint return).

The American Opportunity Credit is available for the first four years of a student's post-secondary education. Up to 40 percent of the credit amount is refundable if the taxpayer does not have sufficient income to offset with the credit.

The taxpayer must pay the QTREs, and the person for whom the credit is claimed must be an "eligible student." QTREs for purposes of the American Opportunity Credit include qualified tuition, fees and course materials. An eligible student is one enrolled at least half-time in a program that leads to a degree, certificate or other recognized educational credential.

Lifetime Learning Credit
A taxpayer may claim a tax credit for 20 percent of up to $10,000 of QTREs for himself or herself, the taxpayer's spouse, and the taxpayer's dependent children. (Unlike the American Opportunity Credit, this amount is not indexed for inflation.) The maximum credit is $2,000 per taxpayer, without regard to the number of eligible students in the taxpayer's family. For the Lifetime Learning Credit, there is no requirement that the student be studying towards a degree or be enrolled at least half-time, and there is no limit on the number of years the credit may be taken. QTREs for purposes of the Lifetime Learning Credit do not include room and board, transportation or course materials. There is no limit on the number of years in which the credit can be claimed.

For 2010, the Lifetime Learning Credit begins to phase out when the taxpayer's modified adjusted gross income exceeds $50,000 ($100,000 for a joint return).

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