Phaseouts for Education Tax Benefits

The education tax credits were specifically targeted to individuals in middle to lower income levels as a means to help them achieve a better standard of living by pursuing advanced training and education.  With unemployment as high as 15% in some areas of the country, people who previously had income levels that exceeded the limits for the education and tuition tax credits are finding themselves eligible for a tax and education credit for the first time ever.

However, the amount of the American Opportunity Tax Credit, Hope Scholarship Tax Credit, or Lifetime Learning education tax benefits are subject to phase-outs over certain income levels. If your modified adjusted gross income is below the phase-out, your credits will not be reduced. If your adjusted gross income is in the middle of the phase-out range, your credits will be partially reduced. If your adjusted gross income exceeds the phase-out range, you will not be able to claim any tax and education credits.

‘    $48,000 to $58,000 : Single, Head of Household, or Qualifying Widow
‘    $96,000 to $116,000 : Married Filing Jointly

The American Opportunity Credit, Hope Scholarship, or Lifetime Learning tax and education credits are claimed on IRS Tax Form 8863, Education Credits. The Form has instructions and worksheets to help you figure how much, if any tax and education credits you qualify for and what exceptions may apply.  For example, taxpayers who are married but filing separately may not claim tax and education credits for the American Opportunity Tax Credit, Hope Scholarship Tax Credit, or Lifetime Learning Tax Credit.

In addition to income limitations, the IRS stipulates that adjustments must be made to qualified education expenses for the following items which may eliminate or reduce your tax and education credits:

‘    Reimbursement for qualified educational expenses by your employer
‘    Tax-free distributions from a Coverdell (Education) IRA or other qualified tuition payment plan
‘    Interest from U.S. Savings bond that you excluded from income because it was used to pay for educational expenses
‘    The tax-free portion of any scholarships or fellowship grants
‘    Veteran’s educational assistance funds
‘    Any non-gift, non-taxable funds received to pay educational expenses

---