IRS Issues Regulations Regarding Education Credits

The Internal Revenue Service has issued final regulations regarding the use of the Hope Scholarship Credit and the Lifetime Learning Credit. The regulations clarify some areas of discrepancy surrounding the two credits.

The Hope Scholarship Credit applies to higher education costs of students in their first two years of college and has an annual limitation of 100% of the first $1,000 paid for such expenses and 50% of the second $1,000 paid, or $1,500. The Lifetime Learning Credit applies to the costs of higher education, including all years of undergraduate schooling, graduate schooling, and certain courses taken to improve job skills. There is an annual limit on the Lifetime Learning Credit of 20% of the first $5,000 spent or $1,000. There are income ceilings that prevent higher income taxpayers from claiming these credits

New regulations include the following points that will help taxpayers understand these credits and use them more effectively:

  • While a rule that allows higher income taxpayers to take advantage of the education credits by not claiming the child/student as a dependent and letting the child claim the credit was left in place, the new regulations make it clear that a child who could have been clamed as a dependent of a parent will lose his personal exemption if he claims the credit.
  • Taxpayers cannot combine expenses from two or more students to achieve the maximum amount of credits. Parents with two children in college, for example, with expenses under the maximum allowable for one child and expenses over the maximum allowable for the other child cannot add the costs for the more expensive student to the other student to maximize credits.
  • The definition of qualified higher education costs is expanded to exclude student health and transportation costs.
  • Credits may not be used for room and board, insurance, and similar personal expenditures even if the amounts are paid directly to the educational institution.

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