Recently I was listening to an IRS webcast on tax law changes (yes, it’s just as exciting as it sounds!) and something caught my attention. I was already aware that people living in disaster areas are eligible for various kinds of tax relief, but I realized that I’d missed an important fact. You don’t have to live in a disaster area to get a tax break; the Heartland Disaster Tax Relief Act of 2008 includes special provisions for educational expenses incurred by students attending college in areas struck by disaster in 2008. This article will be of interest even if you don’t qualify for the expanded disaster relief benefits but are interested in tax benefits available to households with college expenses.
The general source of information on education-related tax benefits is IRS Publication 970, “Tax Benefits for Education.” If someone in your household is in college, it’s wise to get a copy of the latest version and scan the “What’s New” section near the beginning to see if there are changes that might reduce your taxes.
For 2008, if you have a child or other household member who attended an eligible educational institution in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, or Wisconsin in a specified disaster area, you may qualify for additional benefits. A table showing the affected counties and dates is available in Table 1 from Publication 4492-B. The tax benefits affected are the tuition and fees deduction, the Hope Credit, and the Lifetime Learning Credit.
Tuition and Fees Deduction
A tuition and fees deduction of up to $4,000 can be taken even by those who don’t itemize; the deduction is available to single taxpayers whose Modified Adjusted Gross Income (MAGI) is less than $80,000 and to joint filers with MAGI less than $160,000.
For students in 2008 Midwestern disaster areas, the definition of deductible qualified education expenses was expanded. In addition to tuition and fees required for enrollment or attendance at an eligible educational institution, qualified expenses for these students include books, supplies, and equipment required for enrollment or attendance. For special needs students, expenses necessary for enrollment or attendance at an eligible educational institution are included. For anyone who’s at least a half-time student, the reasonable costs of room and board may be included. The room/board deduction is limited to an amount not more than the greater of (1) an allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance, or (2) the actual amount charged if the student lived in housing owned or operated by the eligible educational institution.
The Hope credit is a dollar-for-dollar reduction of the amount of tax owed. It can be claimed only for the first two years of post-secondary education, and is available to every eligible student in a household. Qualified expenses include tuition and certain other fees and expenses only if they must be paid to the institution as a condition of enrollment or attendance.
In 2008, the maximum amount of the Hope credit is normally $1,800, calculated as the sum of 100% of the first $1,200 plus 50% of the next $1,200 in qualified educational expenses.
For students in disaster areas, the total allowable credit was doubled, to $3,600: 100% of the first $2,400 in expenses plus 50% of the next $2,400. The Hope credit is phased out for taxpayers with MAGIs between $48,000 and $58,000 (single) or $96,000 and $116,0000 (joint return); taxpayers with MAGIs above these limits are not eligible for the credit.
Lifetime Learning Credit
The Lifetime Learning credit can be claimed for all years of post-secondary education or for qualified courses taken to acquire or improve job skills. The rules for qualified expenses are the same as the Hope credit.
Only one lifetime learning credit can be claimed per return per year; this is an important difference from the Hope Credit.
The amount of the lifetime learning credit is normally 20% of the first $10,000 of qualified education expenses paid for all eligible students with a maximum credit of $2,000. For students in Midwestern disaster areas, the rate is modified to 40% of qualified expenses paid, with a maximum credit of $4,000.
Income phase-outs for the Lifetime Learning Credit are the same as for the Hope Credit: $48,000 – $58,000 (single)/ $96,000 – $116,0000 (joint).
No Double Dipping
The tuition and fees deduction, Hope Credit, and Lifetime learning credit cannot be applied in the same year for the same student. Taxpayers eligible for more than one benefit must determine which is most advantageous; those with more than one child in college may find that taking different benefits for different students results in a lower overall tax bill than using the same benefit for each child.
Read The Fine Print
There are plenty of “provisos and quid pro quos” that apply to education tax benefits; they are beyond the scope of this post. As always, be sure that you understand the rules; otherwise, seek professional tax advice to be sure that you’re eligible for one of these tax breaks and to make sure that you are taking maximum legal advantage of the tax laws.
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