Education credit tax planning.

• Author: Moore, Philip E.

On a dollar-for-dollar basis, the Hope and Lifetime Learning Credits can offset taxes owed. The basis for both credits is the qualified education expenses paid to qualified educational institutions. Generally, there are few tax planning opportunities associated with these credits. However, in certain situations, taxpayers may obtain a full benefit, when one might assume no benefit is available.

The maximum Hope Credit is 100% of the first $1,000 and 50% of the second $1,000 of qualified expenditures. It applies to the first two years of post-secondary education. The Lifetime Learning Credit is 20% of qualified tuition and related expenses up to $5,000. Expenses qualifying for the Lifetime Learning Credit are not limited to the first two years of post-secondary education. The Lifetime Learning Credit applies to a wide array of qualifying education expenditures, including expenses for undergraduate- or graduate-level and professional degree courses, as well as expenses for any course of instruction at an eligible educational institution a student takes to acquire or improve job skills, even if it is not part of a degree program. Both credits are elective and nonrefundable. The excess of a taxpayer's adjusted gross income (AGI) over $40,000 ($80,000 in the case of a joint filer) will reduce both credits. If a taxpayer claims the Hope Credit in one year, he may not claim the Lifetime Learning Credit in that year for the same individual.

Taxpayers often do not realize that these credits need not be lost if their income is too high. Planning to maximize the tax benefit of the Hope and Lifetime Learning Credits may yield a higher tax benefit. Certain strategies may permit the "family unit" to receive the benefit of one or both of these credits, even though a parent's income is too high. Taxpayers with children have the best planning opportunity.

One solution to take advantage of the credit(s) when the parent's income is too high would be to have the student claim the credit(s) on his own return. Regulations issued earlier in the year allow the student to claim the credit even if someone else pays the expenses.

Example: In 2001, parents B and...