How to Maximize Your Education Credits at Tax Time

Tax time is not usually a favorite time of the year. We all look for ways to pay the least amount of tax possible or maximize our refund amount. A tax credit allows us to reduce our tax liability by the amount of the credit. If we owe $3000 in taxes, for example, and have a $500 credit, we then only owe $2500 in taxes. There are some complications that arise if you have too many credits compared to your tax liability, but this direct reduction in tax liability holds true for most people.

Education credits are often misunderstood and not used to their full potential to reduce tax liability. Money spent on tuition qualifies as money that can be used as an education credit. However, money spent on books, room and board, or student activity fees do not count toward an education credit. So, if I spent $10,000 on tuition and $1000 on books, I could only use the $10,000 toward an education credit.

There are two different types of education credits: the Hope Scholarship Credit and the Lifetime Learning Credit. The Hope Scholarship Credit allows the taxpayer to credit one hundred percent of the first one $1,000 of qualified tuition and related fees. Additionally, a taxpayer can credit 50% on the next $1000 of qualified tuition and fees. A taxpayer can only use a maximum of $1500 as a Hope Scholarship Credit. So, if you spent $10,000 on tuition, you could reduce our tax liability by $1500 by using the Hope Scholarship Credit. There are some limits on this credit as well. The credit can only be taken for the first two years of post-secondary education and can be claimed no more than twice for any student. To use the Hope Credit, students must also be enrolled at least half-time in school.

The other education credit is the Lifetime Learning Credit. This credit allows the taxpayer a credit of twenty-percent of up to $10,000 of qualified tuition and related expenses. If you spent $10,000 on tuition, you could reduce our tax liability by $2000 by using the Lifetime Learning Credit. If you have multiple children in school, you can sum the amount spent on each student for this credit. If you spent $4,000 on one child and $6,000 on another, you can still claim a $2000 Lifetime Learning Credit. This credit, unlike the Hope Credit, can be taken for each year of undergraduate and graduate education.

So, what is the best credit to use? That all depends on how much you have spent on tuition and related expenses. If you have spent $10,000, the Lifetime Learning Credit will allow you to credit $2000 while the Hope Credit would only allow a credit of $1500. If you only spent $5000, however, the Hope Credit would be better because it would still allow a $1500 credit while the Lifetime Learning Credit would only give you a credit of $1000 (20% of $5000).Use the Hope Credit in this situation as long as one of the limits described above does not apply.

A taxpayer cannot use both tax credits for the same student; however, if there is more than one student, a taxpayer can use both credits in the same year, the Hope Credit for one student and Lifetime Learning for the other, for a total of $3500 in education credits.

The education credits are often misunderstood and not used properly for their maximum tax reducing power. If you want a bigger refund or to pay less in taxes, follow these steps and use these credits the right way.