Tax Credits for Online Education
- A tax credit could save thousands of dollars
- The various education tax credits are related, but different
- Taxpayers should determine if they are eligible for these credits
The United States Senate and House of Representatives approved the Taxpayer Relief Act of 1997 and it became Public Law 105-34 on August 5, 1997. P.L. 105-34 includes a number of benefits to taxpayers and also includes a tax incentive available to students of all ages: the Hope Scholarship and Lifetime Learning Credit.
On February 17, 2009, the American Recovery and Reinvestment Act (ARRA) was ratified. ARRA included changes affecting education tax credits. One of the changes included the phasing out of the Hope credit and implementing the American Opportunity Credit starting in 2009. "The American opportunity tax credit, which expanded and renamed the already-existing Hope credit, can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010," states the official IRS site.
How much of my educational expenses can be covered?
According to IRS Publication 970—Tax Benefits for Education and Tax Benefits for Education: Information Center:
- American Opportunity Credit: "Many of those eligible will qualify for the maximum annual credit of $2,500 per student. Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year."
- The Hope Credit: "The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education."
- Lifetime Learning Credit: "For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student."
In order the claim any type of education credit, the student must have attended an educational institution that is fully accredited by an agency recognized by the U.S. Department of Education.
Who is eligible to receive these tax credits?
The American Opportunity, Hope, and Lifetime Learning Credits are tax incentives that are available to most taxpayers.* Typically, taxpayers can claim these tax credits on behalf of themselves, their spouses, or their dependents if they meet certain requirements. The following individuals may not be able to take these educational tax incentives:
- Individuals claiming tuition and education expenses as tax deductions
- Individuals who can be claimed as a dependent by another taxpayer
- Joint filers who are filing separately
- Single filers who are nonresident aliens (or were nonresident aliens for any part of the tax year)
- Joint filers whose spouses are nonresident aliens (or were nonresident aliens for any part of the tax year)
- Single taxpayers* whose income exceeded $90,000 ($180,000 for joint filers)
What are differences between the American Opportunity Credit, Hope Credit, and the Lifetime Learning Credit?
| Maximum credit of $2,500 per eligible student | Maximum credit of $1,800 per eligible student | Maximum credit of $2,000 per return |
| Single income cannot exceed: $80,000 or more **| Joint income cannot exceed: $160,000 | Single income cannot exceed: $58,000 or more **| Joint income cannot exceed: $116,000 | Single income cannot exceed: $58,000 or more **| Joint income cannot exceed: $116,000 |
| Available only during first 4 years of postsecondary education and enrolled at least half-time | Available only during first 2 years of postsecondary education and enrolled at least half-time | Available at any point during postsecondary education as well as courses related to job improvement and skills training |
| Available only 4 years per eligible student | Available only 2 years per eligible student | Available any year you file a tax return |
| Student must be working towards an undergraduate degree or other academic credential | Student must be working towards an undergraduate degree or other academic credential | Student does not need to be working towards a degree or other academic credential |
| Student must be enrolled at least half-time for at least one academic period beginning during the year | Student must be enrolled at least half-time for at least one academic period beginning during the year | Available for one or more courses |
| No felony drug conviction can be on student's record | No felony drug conviction can be on student's record | Felony drug conviction regulation does not apply |
What expenses and costs do the American Opportunity, Hope, and Lifetime Learning Credits cover?
The Hope and Lifetime Learning Credits consider eligible expenses as any fees paid to your school as it relates to enrollment. According to the IRS, "Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance."
In contrast, the American Opportunity Credit considers tuition as well as course materials as eligible expenses: "books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance."
Note: For the Hope and Lifetime Learning Credits, certain online schools offer a very good deal. Penn Foster College, for example, includes the cost of books and supplies in its tuition fee.
Where can I find additional information?
Additional information can be found on the Web site of the Internal Revenue Service (American Opportunity Credit: Questions and Answers, Education Credits IRS Form 8863). Detailed explanations are included in this publication as well as the eLearners.com Guide to Online Education.
* Who is a taxpayer? A taxpayer is not necessarily a citizen of—or even reside in—the United States of America. A taxpayer is an individual who earns enough U.S. source income that requires the filing of federal taxes to report income to the IRS. Nonresident aliens are not able to take the Hope Credit or the Lifetime Learning Credit.
** Filing as single, head of household, widow(er)
Victoria Patrick is Content Manager for eLearners.com.
Comments for Tax Credits for Online Education:
1 comment(s)
Tina On Wednesday, March 02 2011
Great info, thanks!