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[Abe Kohen]

Getting Some Tuition Dollars Back

By Doing Your Homework On Tax Credits, Deduction, You Could Save $4,500
By KAJA WHITEHOUSE
DOW JONES NEWSWIRES

If the cost of higher education is getting you down, take solace in the fact
that you may be able to lighten the load through your tax return.

For 2003, there are two credits and one deduction you might take for the
cost of sending yourself or your dependents to school. If you qualify for
all three, you might save more than $4,500 this year.

The trick is figuring out which combination of credits and deductions will
offer you the greatest savings. What you ultimately choose will depend on a
multitude of factors, including how many kids you have, how much you paid in
education costs, your modified gross adjusted income, and even what level of
schooling your tuition expenses covered last year.

Among the details to consider: Uncle Sam has doubled the savings limit for
one of the credits -- the Lifetime learning credit -- to a high of $2,000
from $1,000. Last year, the other credit, known as the Hope credit, was
considered the better choice because it offered maximum savings of $1,500.
Now, people who qualify for both credits, but who must choose one, may be
more likely to lean toward the Lifetime learning credit.

The tuition and fees deduction, usually considered a last resort, can cut
your taxable income by a maximum $3,000 this year, and that rises to $4,000
next year. This deduction is above-the-line, which means that you don't have
to itemize to take this tax break.

When deciding what strategy to use, start with your income to see if you
qualify. The two credits are available to married couples filing jointly
with incomes not exceeding $103,000, or single people with incomes no
greater than $51,000.

If your income exceeds those limits, you may still qualify for the
deduction, which is available to joint filers with modified adjusted gross
income of $130,000, and single filers who come in at $65,000.

If you pass the income test, you next will want to tote up the number of
students for which you helped pay tuition and other higher-education
expenses. Internal Revenue Service rules say that you can't claim more than
one of the three tax benefits for the same expense. So, if you are assisting
three students through school, you might benefit from both the credits and
the deduction in the same year. If you're helping just one student, you're
limited to choosing just one of the strategies.

In the case of one student, you will want to qualify for the credits rather
than the deduction. That's because credits are almost always worth more as a
direct reduction of taxes owed, while a deduction is just a reduction of
your taxable income, said Jackie Perlman, senior tax-research analyst with
H&R Block Inc. in Kansas City, Mo. Assume you're in the highest tax bracket
of 35%. A deduction of $3,000 would save you just $1,050, less than the
maximum savings from the credits of $1,500 to $2,000.

When choosing between the two credits there's also a rule of thumb. If you
spent more than $7,500 on college costs, you will want to go with the
Lifetime learning credit. That's because the Lifetime learning credit is a
credit of 20% on tuition costs as high as $10,000. The Hope credit promises
a 100% credit on the first $1,000 and a 50% credit on the second $1,000.

Say you paid $4,000 in tuition for your son last year. With the Hope credit,
you would save $1,500. With the Lifetime learning credit, you would save
just $800, or 20% of $4,000. It's only after the $7,500 limit that you begin
to see savings of more than $1,500 with the Lifetime learning credit.

As with all things in taxes, however, there are a couple of caveats that may
change the equation, so you really need to review the law and crunch the
numbers. The Hope credit, for example, can be used to offset only costs paid
for the first two years of postsecondary school, and for students taking at
least half a semester's worth of courses. That means that if your child is
in graduate school, or just taking one class a semester, you have no choice
but to take the Lifetime learning credit even if you paid less than $7,500
in tuition costs last year.

The best resource to double-check the rules is IRS publication 970, titled
"Tax Benefits for Education." It outlines the details of the education tax
benefits in easy-to-understand language with examples to illustrate
different points.

Also, remember that the calculations can change dramatically once you have
more than one student in school. Consider that the $1,500 Hope credit can be
taken for each student who qualifies, while the $2,000 Lifetime learning
credit can't be doubled. So if you have twins in their freshman year, you
will probably be better off with the Hope credit for maximum savings of
$3,000 than the $2,000 Lifetime learning credit.

Scenarios compiled by software provider Intuit Inc. demonstrate that people
paying for more than one student's schooling can lose a lot of money by not
choosing the right combination of credits and deductions. A couple earning
$100,000 a year and putting two kids through school at an annual cost of
$12,000, for example, could save $1,200 if they used the deduction and the
Hope credit. By automatically relying on the Lifetime learning credit, on
the other hand, the couple would save just $300.

"The bottom line," said Fred Grant, a senior tax analyst with Intuit, "is
that there is no substitute for running the numbers and evaluating the
various alternatives when doing your taxes."

Copyright 2004 Dow Jones & Company, Inc. All Rights Reserved

[rick++]

Tax credits are a phantom to appease the middle class.
I've seen graphs in the paper showing that over net tuition paid
increases with amount of new federal subsidies or faster.
So the politicians pretend they are helping with colleges costs
when in fact they are stimulating them.

Then you have a byzantine system of scholarships,
tax credits, and kickbacks, which the truly clever can exploit
to get a bigger piece of the pie.

(The same game is happening in residential real estate.)