Lifetime Credit

The lifetime learning credit, like the Hope credit, can be claimed for qualified tuition expenses incurred during the course of postsecondary study at an accredited technical-vocational institute, college, or university. The lifetime credit is available to a taxpayer, taxpayer’s spouse, or individuals the taxpayer can claim as dependents. For each household, a $2,000 maximum lifetime learning credit can be claimed each year; this limit is calculated as 20% of a family’s total qualified tuition expenses up to $10,000. A student cannot claim the Hope and lifetime credits in the same year; in other words, the lifetime credit is available to a student any year the Hope credit isn’t used.

Unlike the Hope credit, the lifetime learning credit is good for any stage of postsecondary education, including study at graduate school. Perhaps of greater importance, there is no limit on the number of years the lifetime credit can be claimed: it can be taken once, twice, or more. In addition, the lifetime credit doesn’t impose a workload requirement and allows a student to take non-degree classes or enroll in courses to acquire or improve job skills. In contrast, the Hope credit is predicated on the first two years of full- or half-time study for a degree, certificate, or other acceptable educational credential and expires–becomes void–after two uses by the same student.

Another prominent difference between the credits is the unit of measure. Specifically, the unit of measure to determine the dollar limit for the lifetime credit is not the individual but rather the household; the $2,000 limit applies regardless of the number of eligible students living under the same roof. Conversely, the unit of measure for the Hope credit is the individual student; put differently, there is no dollar limit at the household level for the Hope credit.

The Hope and lifetime learning credits have the same income limitation, and these credits are not available in 2007 to single individuals with modified adjusted gross income (AGI) over $57,000 or joint filers with modified AGI over $114,000 (the 2008 limits are $58,000 for single and $116,000 for joint filers). (Note: For the most part, modified AGI is AGI plus any exclusion or deduction for foreign earned income and foreign housing costs.) In addition, the credits are subject to phase out at lower levels of modified AGI: for single taxpayers, the phaseout range is $47,000 to $57,000 modified AGI (in 2008, the range is $48,000 to $58,000); for joint filers, the phaseout range is $94,000 to $114,000 modified AGI (the range in 2008 is $96,000 to $116,000).

Finally, the (pdf file) is not bound by the felony drug rule, that is, a student qualifies for the credit even if convicted at the state or federal level for felony drug possession or distribution. Other rules and regulations for the Hope and lifetime learning credits are the same; click on , an earlier post to this web log, and for a full discussion.

The example below provides a summary of the tax advantages provided by the Hope and lifetime credits and also points out important differences between the two.

Example: A married couple filing jointly with a modified AGI of $102,000 in 2008 claims their daughter as a dependent and pays $8,000 in qualified graduate school tuition on her behalf. The couple’s excess modified AGI is $6,000 ($102,000 modified AGI - $96,000 phaseout threshold) or 30% of the $20,000 phaseout range ($6,000/[$116,000 upper phaseout limit - $96,000 lower phaseout limit] or $6,000/$20,000), which reduces the tentative lifetime learning credit of $1,600 (20% of $8,000 qualified expenses) by 30% to a final allowable amount of $1,120. Because the daughter is enrolled in graduate school, she is not eligible for the Hope credit. But if we change the example slightly so that the couple’s daughter is enrolled as either a freshman or sophomore and not as a graduate student, then the Hope credit becomes an option, indeed, the better choice. First, the Hope credit is good only for the first two years of postsecondary (undergraduate) study or equivalent. Second, it will increase the couple’s tax credit by $140 (the tentative $1,800 Hope credit reduced by 30% to a final allowable amount of $1,260 minus $1,120 available under the lifetime credit).

Supplementary relevant articles on the lifetime learning credit are listed below:

Many happy returns, Roger

Hope Credit

Single taxpayers and joint filers can claim a nonrefundable for certain higher education expenses. The Hope credit is available to the taxpayer, taxpayer’s spouse, or individuals the taxpayer can claim as dependents. Married individuals filing separate returns are not eligible for the Hope credit. However, there is an exception: A married person who (1) lives apart from his or her spouse for the last six months of the year, (2) pays over one-half of the cost of keeping up a home, (3) provides housing for one or more dependents, and (4) files a separate return is considered an unmarried head-of-household filer and therefore eligible for the Hope credit.

In terms of actual dollar amounts, a taxpayer in 2007 can claim a maximum credit of $1,650 per student per year for qualified tuition paid in each of the first two years of postsecondary study at a suitable educational institution. A close reading of the phrase “each of the first two years…” indicates the Hope credit can be claimed for the freshman and sophomore years of college or equivalent at a technical-vocational institute; that is, the Hope credit expires after two uses by the same undergraduate student and doesn’t count toward graduate study. The maximum credit of $1,650 is equal to a 100% credit for the first $1,100 and a 50% credit for the second $1,100 of qualified postsecondary tuition paid to a technical-vocational institute, college, or university. In 2008, the maximum credit will increase to $1,800 or 100% of the first $1,200 and 50% of the next $1,200 of qualified tuition expenses.

The Hope credit has an income limitation, that is, it is not available in 2007 to single individuals with modified adjusted gross income (AGI) over $57,000 or joint filers with modified AGI over $114,000 (the 2008 limits are $58,000 for single and $116,000 for joint filers). (Note: For the most part, modified AGI is AGI plus any exclusion or deduction for foreign earned income and foreign housing costs.) In addition, the credit is subject to phase out at lower levels of modified AGI: for single taxpayers, the phaseout range is $47,000 to $57,000 modified AGI (in 2008, the range is $48,000 to $58,000); for joint filers, the phaseout range is $94,000 to $114,000 modified AGI (the range in 2008 is $96,000 to $116,000).

For purposes of the Hope credit, a qualified educational institution is any postsecondary educational institution able to participate in student aid programs administered or supervised by the U.S. Department of Education, namely, any accredited college, university, or technical-vocational institute.

Qualified tuition expenses qualify for the Hope credit in the year paid even if made with borrowed funds. Tuition payments are considered a current-year expense if traceable to an academic period that starts in the first three months of the succeeding tax year (e.g., qualified tuition paid for spring semester 2009 would be a qualifying 2008 expense). Fees other than tuition are not acceptable for purposes of the credit unless required as a condition of enrollment or attendance. Tuition for “hobby” courses (i.e., courses involving games, sports, side interests, etc.) or noncredit courses do not count toward the Hope credit unless part of a student’s degree program. Other fees such as room and board, student health fees, and transportation are not eligible for the credit; bundled fees must be disaggregated and allocated to appropriate categories by the educational institution. Perhaps contrary to expectation, amounts paid for books, supplies, and equipment are not acceptable expenses unless required for enrollment or attendance. Click on (pdf file) to see the form taxpayers use to claim the Hope credit.

A student meeting the following requirements is eligible for the Hope credit:

  1. The student hasn’t used the Hope credit more than once.
  2. The student hasn’t completed the first two years of postsecondary education.
  3. The student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational diploma or credential.
  4. The student hasn’t been convicted of state or federal felony drug possession or distribution.

It is important to note that only the parent with the right to a dependency exemption can claim the Hope credit. However, because the Hope and lifetime learning education credits are exceptions to the general rule that the eligibility to claim, not the actual use of, a dependency exemption determines tax benefits, a parent can elect not to claim the exemption and thereby shift the tax advantage of the Hope credit to the student-dependent. But if a third-party (that is, someone other than the taxpayer, taxpayer’s spouse, or taxpayer’s dependent) pays tuition directly to an institution, then it is possible for the taxpayer with rights to the student’s dependency exemption to treat the payments as his or her own and use this fact as a reason to claim the Hope credit. Or a third-party making tuition payments on the student’s behalf may claim the Hope credit. For example, a grandparent who pays more than 50% of the student’s total support for the year acquires the right to not only a dependency exemption for the student but also the Hope credit by reason of meeting the support test for a qualifying relative.

Payments of qualified tuition expenses with tax-free funds or investments such as Pell grants, scholarships, educational savings accounts, qualified tuition plans, and tax-exempt bonds reduce the available Hope credit dollar-for-dollar. By the same token, a credit and deduction cannot be claimed for the same expense. Nontaxable reimbursements reduce the Hope credit but not taxable reimbursements. Finally, a student cannot claim both the and the other major education credit, the lifetime learning credit, in the same year.

Supplementary relevant articles on the Hope credit are listed below:

Many happy returns, Roger

Adoption Credit

In 2008, a taxpayer may claim a maximum adoption credit of $11,650 ($11,390 in 2007) for each adoption effort. The limit is cumulative and traces the costs of each adoption effort; it does not necessarily refer to the costs associated with a particular individual but rather the total costs of an adoption effort that ultimately proves successful. Put differently, the credit is for a successful adoption; there is no requirement the individual eventually adopted be the same as the one originally sought. In short, it adds the costs of prior unsuccessful efforts to a successful, finalized adoption.

If by chance the sum of regular and alternative tax liability doesn’t exhaust the credit, then it can be carried forward for five years. For the 2008 tax year, the adoption credit will be phased out ratably for taxpayers with modified adjusted gross income (AGI) between $174,730 and $214,730 (the 2007 phase out range is $170,820 to $210,820 AGI). (Note: Modified AGI is AGI plus tax-free foreign income.) The adoption credit limit and the range of AGI subject to phase out are adjusted annually for inflation.

Single, head of household, and qualifying widow(er) filers can claim the credit. Married couples must file a joint return in order to claim the adoption credit. However, if a married person has custody of a qualifying individual for more than one-half of the year, lives apart from his or her spouse for the last six months of the year, and pays more than 50% of the cost of keeping up a home, then he or she can claim the credit by filing as head of household.

For purposes of the adoption credit, a qualifying individual is (1) a child under 18 years of age, (2) a person not physically or mentally capable of self-care, or (3) a special needs child.

A special needs child has the following attributes:

Qualified adoption expenses include the following items:

Surrogate parenting costs, expenses in violation of state or federal law, and the costs of adopting a spouse’s child are not eligible for the credit. Click on (pdf file) for a copy of IRS Form 8839 (Qualified Adoption Expenses) and (pdf file) for help on filling out the form. In addition, the adoptive parents or individual must obtain a taxpayer identification number for the adoptee; click on to access useful information on this topic.

A taxpayer can claim the credit at various times depending on the adoptee’s status as citizen or resident of the United States:

An exclusion from gross income is available for qualified adoption expenses paid by taxpayer’s employer under a written, nondiscriminatory adoption assistance plan. In the case of a special needs child, the entire credit or exclusion applies even if the taxpayer has zero qualifying adoption expenses. However, the sum of the credit and exclusion cannot exceed $11,650 for each qualifying individual in 2008 ($11,390 in 2007). In other words, the Internal Revenue Code frowns upon double benefits: a credit and exclusion cannot be claimed for the same expense.

Additional relevant articles on the adoption credit are listed below:

Many happy returns, Roger

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