Who's paying for your child's education? A summary of education incentives.

• Author: Krantz, Kevin
• Position: Taxation

The Taxpayer Relief Act of 1997 added several new tax advantages for those incurring higher education expenses and tinkered with some of the existing ones. With a handful of opportunities available, it is important to understand each of these options, as well as how they work together.

Tax Credits

The most dramatic change is the introduction of credits for qualified education expenses. Two types of credits are available, the Hope scholarship credit and the lifetime learning credit. Exhibit 1, on page 540, presents a comparison of the credits' calculations and rules.

Exhibit 1: Hope and Lifetime Learning Credit Comparision Hope credit Eligible students Enrolled in a degree, certificate or other program leading to a recognized educational credential at an eligible educational institution and carrying at least one-half the normal full-time work load Academic years First two years of post-secondary education Eligibility Only if credit has not been claimed for any two prior tax years Effective date For expenses paid after Jan. 1, 1998, for academic periods starting after that date Credit calculation All of the first $1,000 of qualified expenses and 50% of the next $1,000 of qualified expenses Aggregate limit One credit for each of the taxpayer's eligible students plus one credit for the taxpayer, plus one credit for the taxpayer's spouse Other restrictions Not available to a person convicted of a drug-related felony Lifetime learning credit Eligible students Enrolled in a degree, certificate or other program leading to a recognized educational credential at an eligible educational institution Academic years All academic years Eligibility Anytime Effective date For expenses paid after June 30, 1998, for academic periods starting after that date Credit calculation 20% of up to $5,000 of qualified expenses Aggregate limit Qualified expenses of the taxpayer, spouse and dependents are combined and only one credit can be taken per family Other restrictions None Taxpayers will receive credits for qualified expenses that the taxpayer, spouse and dependents incur. A taxpayer may only claim a credit for himself if he is not eligible to be claimed as a dependent on another person's tax return. However, a taxpayer may include expenses paid directly by a dependent when calculating the credit.

Expenses eligible for the credit include tuition and fees required for the enrollment or attendance at an eligible educational institution. The definition is expanded for the lifetime learning credit to include tuition and related expenses for any course of instruction at an eligible educational institution to acquire or improve job skills. Qualified expenses do not include expenses for courses involving sports, games or hobbies, unless they are part of the individual's degree program. Also excluded are books, student activity fees, athletic fees, insurance expenses or other expenses (including meal and lodging expenses, transportation and similar personal, living or family expenses) unrelated to an individual's academic course of instruction.

Eligible educational institutions are accredited postsecondary...