It’s getting down to the wire for filing your 2003 federal income tax return. However, if you are planning to take advantage of tax benefits for education, you should know what benefits exist and what changes, if any, have been put in place for the 2003 tax year.

There are two available tax credits, and one important deduction, available for higher education.

The tax credits have names. They are called the Hope and Lifetime Learning credits, respectively.
A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which only reduces the amount of income subject to tax, a credit directly reduces your tax burden, if you are eligible to claim it.

Generally, you can claim a Hope or lifetime learning credit if:

  1. You pay qualified education expenses of higher education;
  2. You pay those education expenses for a qualified student; and
  3. The eligible student is yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

You can claim either the Hope or the lifetime learning credit, but not both. So which one should you utilize? Before I answer that question, I will add this qualifier. Neither the Hope nor the lifetime learning credit is available to you if your status is married, but filing separately. If you are married and filling a joint return, you are eligible for either of these credits, but there are income phase-outs beginning at 83,000 for joint filers and credits are not available at all if your modified adjusted gross income (MAGI) is 103,000 or more.

If you were below those income ceilings, and if your higher education expenses were greater than $7500 in 2003, then claiming a lifetime learning credits is probably the way to go, unless you are claiming for multiple students. The lifetime learning credit is for up 20 percent of higher education related expenses, or up to $2000 per return. The Hope credit limit is $1500, per eligible student.

Some other key differences are:

The lifetime learning credit is a) available for all years of postsecondary education and for courses to acquire or improve job skills; b) available for an unlimited number of years; and c) the student does not need to be pursuing a degree or other recognized education credential. The Hope credit, on the other hand, is a) available only until the first two years of post-secondary education is completed; b) available only for 2 years per eligible student; and c) the student must be pursuing an undergraduate degree or other recognized education credential.

The tuition and fees deduction, which Congress chose not to “name” as it did with the above-described tax credits, has an income limit of $65,000 MAGI for single filers and $130,000 for joint filers in order for you to take advantage of the maximum deduction of $3000 for tax year 2003. A $2000 maximum deduction is available if your MAGI is greater than $65000 as a single filer, but not greater than $80,000 and, as a joint filer, if your MAGI is greater than $130,000 but not greater than $160,000.

As I’ve written about in previous columns, this tuition and fees deduction will disappear, or “sunset,” following tax year 2005, unless Congress acts to extend it, and the President of the United States signs such an extension into law.

At College Parents of America, we hope to preserve, expand and extend the Hope and lifetime learning tax credits, as well as the tuition and fees deduction. An investment in higher education is an important investment in the future of America and the tax code, we believe, should reflect the tremendous societal benefit of higher education and lifetime learning activity.