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Tax Benefits for Higher Education

American Opportunity Tax Credit

The American Opportunity Tax Credit, which expanded and renamed the former Hope Scholarship, can be claimed for tuition and certain fees your family pays for higher education in 2009 and 2010. Your family may claim a tax credit of up to $2,500 for each eligible dependent for expenses (including qualified tuition, course materials and related expenses) for the first four years of post-secondary education.

To be eligible for the full credit, you must have a modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers). The credit is reduced ratably if a taxpayer’s modified adjusted gross income exceeds those amounts. The credit is reduced ratably if a taxpayers income is between $80,000 and $90,000 as a single taxpayer, or between $160,000 and $180,000 if married and filing jointly.

Lifetime Learning Tax Credit

Your family may claim up to $2,000 for the taxpayer, taxpayer’s spouse, or any eligible dependents for an unlimited number of tax years. The amount of the tax credit is up to 20 percent of the first $10,000 of qualified educational expenses paid, but no more than $2,000 per family. The actual amount of the credit depends on your family’s income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition.

To qualify for this credit, an eligible taxpayer must claim an eligible student as a dependent on the tax return, unless the credit is for the taxpayer or the taxpayer’s spouse. The eligible student must be enrolled at least half-time in an eligible degree program at an eligible school. You may not claim this credit if your modified adjusted gross income is $60,000 or more for a single taxpayer, or $120,000 or more for married taxpayers filing jointly. The credit amount is ratably reduced for families with incomes between $50,000 and $60,000 as a single taxpayer, or between $100,000 and $120,000 if married and filing jointly.

Understanding the Tuition and Fees Tax Deduction

This deduction can reduce the amount of your taxable income by as much as $4,000. The exact amount of the deduction depends on the qualified tuition and related expenses that you pay for yourself, your spouse or a dependent for whom you are entitled to claim an exemption on your tax return. You may not deduct expenses for personal, living or family expenses, including room and board, insurance, medical expenses or transportation. The eligible student must be enrolled in one or more courses at an eligible educational institution. You cannot claim this deduction if your modified adjusted gross income is $65,000 or more as a single taxpayer, or $130,000 or more for married taxpayers filing jointly. You can deduct up to $2,000 if your modified adjusted gross income is between $65,000 and $80,000 or between $130,000 and $160,000 for married taxpayers filing jointly. You also may not claim the deduction if the tuition and fees were paid with a tax-free scholarship, grant or other educational assistance.

Understanding the Student Loan Interest Deduction

The Student Loan Interest Deduction can reduce the amount of your taxable income by as much as $2,500 per year. The exact amount of the deduction depends on the interest paid during the calendar year (including loan origination fees) on an eligible student loan, but will not exceed $2,500. An eligible taxpayer must claim an eligible student as a dependent on the tax return, unless the deduction is for the taxpayer or the taxpayer’s spouse. An eligible student must be enrolled at least half-time in a degree seeking program at an eligible institution. You cannot take this deduction if your modified adjusted gross income is $70,000 or more as a single taxpayer, or $145,000 or more for married taxpayers. The deduction is reduced ratably if a taxpayers income is between $60,000 and $70,000 as a single taxpayer, or between $120,000 and $150,000 if married and filing jointly.

Can a Family Claim Multiple Benefits?

Your family may claim the Tuition and Fees Tax Deduction along with a Hope Scholarship Credit, a Lifetime Learning Tax Credit, and an exclusion from gross income for distributions from qualified tuition programs or education IRAs, as long as the same student is not used as the basis for each deduction, credit, or exclusion.

Visit www.irs.gov to download an updated copy of publication 970 "Tax Benefits for Education"